NAB is the ASX 200 bank share I’d buy today

There are plenty of ASX bank shares in the S&P/ASX 200 Index (ASX: XJO). At the moment, National Australia Bank Ltd (ASX: NAB) shares would be my pick out of that sector.

It can be hard to choose because there are so many different names including Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC).

But there are a few key reasons for my preference for NAB over the other big four ASX 200 bank shares, so I will outline them below.

Growth

Banks are not known for being growth shares. But, I believe that it’s important that the investments we choose offer a bit of growth, even if it’s only a relatively small amount.

I think that NAB is demonstrating an impressive amount of growth (for a big bank) and it’s doing it profitably.

The bank and its management have been working hard at improving the business and “getting the basics right”. NAB has also been working on improving “customer and colleague outcomes to deliver sustainable growth and improved shareholder returns.”

In the FY22 third quarter, NAB reported cash earnings of $1.8 billion and statutory net profit after tax (NPAT) of $1.85 billion. The cash earnings represented a year-over-year growth of 6%. Before tax and credit impairment charges, cash earnings increased 10%.

Excluding the Citi acquisition, and before credit impairment charges and tax, NAB’s third quarter cash earnings grew by 2% compared to the FY22 first half quarterly average.

While there are plenty of other ASX shares that will have reported much stronger growth this reporting season, I think NAB is looking good, particularly as the benefits of higher interest rates will start to show on its profit margins. However, it will be worthwhile keeping an eye on the level of loans arrears in 2023 and beyond.

Valuation

Based on estimates on Commsec, NAB is projected to generate $2.39 of earnings per share (EPS) in FY23. That puts the current NAB share price at under 13 times FY23’s estimated earnings.

Compare that to CBA, which is valued at over 17 times FY23’s estimated earnings, according to CommSec. The price/earnings (p/e) ratio isn’t the only way to compare banks, but I think it can show how much cheaper NAB is compared to CBA. It’s the better value ASX 200 bank share out of the two.

It’s true that ANZ is valued at under 11 times FY23’s estimated earnings and Westpac is valued at just over 11x FY23’s estimated earnings. But, I like the quality that NAB is demonstrating and how it’s delivering profit growth.

Dividend yield

I am also attracted to the dividend income that NAB is paying and could pay.

In FY23, NAB is predicted to pay an annual dividend per share of $1.63 per share, according to Commsec. That would represent a grossed-up dividend yield of 7.8% at the current NAB share price.

Then, in FY24, the ASX 200 bank share could grow its annual dividend by 4.4% to $1.70 per share. This would be a grossed-up dividend yield of 8.1%.

I think the combination of rising earnings, a strong starting dividend yield and a growing dividend will lead to solid total returns in the coming years.

The post NAB is the ASX 200 bank share I’d buy today appeared first on The Motley Fool Australia.

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More reading

• The NAB share price is trading on a 4.6% dividend yield right now. How does this compare to other banks?
• The NAB share price has gained 5% since last week’s update. What’s next?
• These top ASX dividend shares have been tipped as buys by analysts
• Why this leading fund manager’s favourite ASX 200 bank share is NAB
• What does CommBank’s latest update mean for NAB shares?

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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