I think we should consider whether it's worth buying shares of National Australia Bank Ltd (ASX: NAB) at this share price.
The Reserve Bank of Australia (RBA) has changed the economic landscape for banks quite significantly compared to two months ago with two interest rate cutes, leaving the Australian interest rate at just 1%.
There are so many different variables of how this affects NAB and the other big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).
For NAB, the bank will reduce its variable home loan interest rates by 0.19% per annum after passing on the whole 0.25% other rate cut last month. The hope is that the interest rate cut will help mortgage arrears go into a better position and also perhaps some people will go out and spend the money, boosting the economy.
Of course, savers will also be feeling the pinch from the declining interest rate.
NAB said that the bank had considered NAB's 930,000 home loan customers, 3 million savings and investment customers and 588,000 shareholders in making the decision. It's hard to say what the net interest margin (NIM) effect is, for NAB's sake I hope it is slightly better now.
One of the oldest pieces of investment advice is that the lower the interest rate goes, the higher asset prices can go to compensate that lower return from cash and bonds.
NAB has certainly seen a rise in its share price – since the start of 2019 the NAB share price has increased by 13.8%, which is quite exciting for such a large business like NAB. That also makes the dividend yield comparatively more attractive.
My concern is that NAB is not as safe as some people think it is. Its revenue may be somewhat locked-in for many years due to the nature of paying back a mortgage, but its expenses and write-offs are not. Rising bad debts from arrears could have a significantly bad outcome for profit.
Foolish takeaway
NAB is trading at 12x FY20's estimated earnings with a grossed-up dividend yield of 8.8%. I don't think this price sufficiently rewards a long-term investor with what the potential downsides could be over the next few years.
