Is the National Australia Bank Ltd. share price going to hit $20?

Credit: NAB

Look out below! The National Australia Bank Ltd. (ASX: NAB) share price is down 19% in 2016 so far.

Source: Google Finance

Source: Google Finance

Worse still, NAB’s share price is down 33.5% since this time last year and 38.6% since its yearly high of $39.71, achieved in April 2015.

What’s going on?

Surprisingly, NAB’s share price has performed poorly despite the bank achieving a number of key initiatives designed to shore up its balance sheet, reduce risk and give it a clearer growth strategy.

Over the past year, NAB’s divested most of its Life Insurance business, has elected to float its troubled UK banking subsidiary on the ASX and London Stock Exchange, and has sold down its US bank to public markets. These are promising endeavours, in my opinion.

However, the bank has also issued significant amounts of new shares to the market and is facing very strong headwinds. As we recently wrote here, our economy is being weaned off the mining sector’s record profits, big bank bad debts are at cyclical lows, housing sector growth is expected to cool and banking regulations are increasing.

Perhaps unsurprisingly, big bank returns could be expected to fall. Think net interest margins, returns on equity and assets – each profitability metric may continue to fall. This is a result of the factors above, but also of increasing competition, higher funding costs and lower interest rates.

Is the National Australia Bank Ltd. share price going to hit $20?

For a few years now, we’ve warned that shares in Australia’s major banks could come under selling pressure. I think our big banks are good businesses, so I wouldn’t be prepared to bet on or forecast the NAB share price hitting $20 anytime soon. However, with some strong headwinds at play, investors may want to think twice before hitting the buy button on big bank shares in 2016.

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Motley Fool writer/analyst Owen Raszkiewicz does not have a financial interest in any company mentioned. Owen welcomes -- and encourages -- your feedback on Google+, LinkedIn or you can follow him on Twitter @ASXinvest.

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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