The National Australia Bank Ltd (ASX: NAB) share price has fallen to $25.66, which is a long way down from its share price of $32 just a year ago.
NAB, along with its big four bank peers of Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) are facing problems on all sides at the moment.
Rising interest rates in the US are causing wholesale costs to rise because around a third of their funding comes from overseas. It’s politically a touchy subject to do out-of-cycle rate rises at the moment and loan-holders may decide to switch bank if the hikes are too hard. NAB’s net interest margin (NIM) may head downwards in the short-term.
Rising interest rates are one of the key reasons why households are struggling, sending house slowly downwards. Of course, there are other factors like less foreign investors, tighter lending requirements and so on. Whatever the reason, lower house prices are bad for banks as bad debts and arrears are likely to rise. The banks have enjoyed cyclically-low bad debts in the last few years.
The Royal Commission is having a particularly bad effect on the banks. They have tightened their lending requirements, which may lower profitability. The financial advice remediation is already costing them many hundreds of billions – NAB recently reported another $314 million of costs & refunds. That’s probably not the end of the costs either.
However, I was pleased to see that NAB didn’t increase its own interest rate recently and has promoted Mike Baird. It may be the best of the big banks.
NAB currently has a trailing grossed-up dividend yield of 11%. This is a huge yield. But, is it sustainable? Investors were drawn to investing in Telstra Corporation Ltd (ASX: TLS) because of the yield, without considering the quality of the underlying business. This could be another trap.
If NAB has to reduce its dividend I wouldn’t be surprised to see the share price fall further. The dividend is definitely not guaranteed.
If I were investing for income I’d rather go for this top stock which just grew its dividend by 20% in FY18.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. 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 Scott Phillips.