NAB shares: Boring or beautiful?

Shares of banking major National Australia Bank Ltd (ASX: NAB) have left plenty to be desired in 2022.

In what’s traditionally a supportive economic climate for banks – higher interest rates, strong historical mortgage growth, downturn in business cycle – NAB hasn’t managed to step up to the plate this year.

Instead, the share has covered a large range and only secured around a 3% gain year to date.

What’s to like about NAB?

The banking major secured a strong first-half performance, growing interest income to $7.1 billion with total revenue of $8.23 billion, each up roughly 2% from the previous half.

Meanwhile, the return on equity (ROE) was 11.1%, around 60 basis points higher than the six months prior.

Hence, the bank enters the remainder of 2022 both well capitalised and in a profitable position.

Not to mention, on its current market capitalisation of $94.7 billion, NAB certainly has the size factor that may help smooth volatility for equity investors’ portfolios.

It also trades on a trailing 4.7% dividend yield and is forecast to deliver a $1.50 per share dividend in FY23 and $1.70 per share in FY24, according to analysts at Goldman Sachs.

At the current market cap, this represents a 5% and 5.7% forward dividend yield, respectively.

There are also no questions over the bank’s financial health either. NAB’s capital adequacy ratios – Tier 1, Core Tier 1, and Tier 2 figures – are within satisfactory ranges with no volatility in recent years.

It’s not all so rosy…

So, the above illustrates that NAB is perhaps a great company [on financial reporting metrics] but we are investors and need to understand if the great company is also a great investment.

One important factor to consider is the bank’s corporate value, made up of its earnings and investments. We record these in shorthand using ratios.

Below is a table that compares National Australia Bank to the other banking majors:

As can be seen, the share trades at a premium to peers within its peer group based on the metrics above.

It’s fair to ask what kind of bang NAB investors are getting for their buck as, ideally, one would like to be paying a discount to access the bank’s strengths, not a premium.

There are also macroeconomic headwinds that must be considered in the investment debate. There is no denying that a downturn in the Australian economy could spell further losses for NAB shares, particularly given the bank’s significant exposure to the domestic mortgage market.

This is coupled with higher lending rates from the banks. Although that should theoretically lift net interest income, given increased competition within the Australian mortgage market, the margin on this income has thinned.

In terms of valuation, NAB shares are trading at a premium to the bank’s peers (unjustifiably so), however, recent earnings trends to date have been strong.

Meanwhile, the NAB share price is floating today and is currently down 0.63% to $29.77.

The post NAB shares: Boring or beautiful? appeared first on The Motley Fool Australia.

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Motley Fool contributor Zach Bristow 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 positions in and has recommended Bendigo and Adelaide Bank Limited. 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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