Why the share price of National Australia Bank Ltd. is surging higher this morning

National Australia Bank Ltd. (ASX:NAB) posted a decent quarterly trading update this morning. While that has excited the market, the devil's in the details…

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shares in National Australia Bank Ltd. (ASX: NAB) are leading the banking sector higher following the release of its quarterly update.

The stock jumped 2.7% to $29 in lunch time trade, while the other Big Banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) are up by around 0.5%.

NAB's December quarter cash earnings improved 3% over the same time last year to $1.65 billion as revenue increased by 1%.

Thank goodness expectations are fairly low as the banking sector is facing a number of headwinds, which include stagnant wage growth, record high household debt, rising costs and a softening lending market.

It also helps that Citigroup has upgraded NAB to a "buy" on the back of this update, as reported in the Australian Financial Review. The broker cited the stock's cheap valuation of 12 times price-earnings (P/E) and its 7% yield as the reasons for the upgrade.

There is also a sense of relief that NAB's reputation is not as tarnished as Commonwealth Bank's with ongoing fines and investigations for bad behaviour.

The upcoming Royal Commission could put more heat on the sector but I don't think NAB will be singled out in particular. Commonwealth Bank will have to contend with being the whipping boy for the sector for a while yet.

However, there are a few negatives in NAB's latest update that I am not so thrilled about (and I am a shareholder).

The first is the all-important net interest margin (NIM), which fell in the quarter. Management said if the Markets and Treasury operations were excluded, NIM would be flat. This compares to Commonwealth Bank's results yesterday where it reported a 6-basis point increase to NIM.

It's a pity NAB couldn't pull off the same feat as costs are starting to bite. The bank said expenses rose 4% due to higher investment spend and personnel cost.

Is this an early sign that the wage growth recession in our country is coming to an end? That's perhaps for another article.

The issue is that the rise in expenses is outpacing earnings growth, and that is not what I like to hear even though management is committing to cutting more than $1 billion in costs by the end of FY20.

Another thing I am not happy to see is the 23% drop in Bad and Doubtful Debt (B&DD) charges to $160 million.

Don't get me wrong, this in itself is good but it obviously helped drive the bank's profit growth. I'd much rather see earnings grow because the bank is attracting more business as opposed to the lowering of provisioning to bolster its bottom line – particularly in this part of the economic cycle.

NAB produced a decent update but it won't convince me to increase my weighting on the banking sector – an area of the market where I am relatively underweight on.

But if you are looking for blue-chips with a more upbeat outlook, the experts at the Motley Fool have some exciting news.

They have uncovered three blue-chips that are well placed to outperform the market this year, if not beyond.

Click on the free link below to find out what these stocks are.

Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. 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.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »