Is the National Australia Bank Ltd (ASX: NAB) share price a buy? The NAB share price is down 0.5% despite CoreLogic just reporting that house prices in Melbourne and Sydney rose 1.4% and 1.6% respectively in August.
I'd imagine some investors are now doing the numbers on NAB as well as on Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ). Does buying shares of the big ASX banks now make sense?
For me, over the past year the main worry has been that falling house prices and economic conditions could lead to rising arrears and bad debts for banks like NAB. That's precisely what we have been seeing from NAB.
In NAB's third quarter trading update it said its credit impairment charges had increased to $247 million from $203 million a year ago. Its ratio of 90+ days past due and gross impaired assets to gross loans and acceptances increased to 0.85% from 0.79% at the end of the past quarter and increased from 0.71% a year ago.
A key question will be whether the arrears continue to rise, or whether the improving economic conditions can help NAB and its borrowers turn things around. But, we are talking about two different sets of borrowers. New home buyers are in good financial positions, whereas borrowers in arrears for over three months are borrowers from previous years when lending was easier and economic conditions have changed.
Cyclical construction businesses like Boral Limited (ASX: BLD) and Adelaide Brighton Ltd. (ASX: ABC) are currently guiding for slower conditions in the shorter-term. It's going to be interesting to see how these different economic factors play out.
Foolish takeaway
NAB is currently trading at 12x FY20's estimated earnings with a grossed-up dividend yield of 9.2%.
If the housing market has truly turned a corner then it may turn out to be a decent time to buy bank shares with how low interest rates are. But, I'm not convinced the recovery is totally here until we see the property performance in September and October when there's likely to be a lot of properties for sale on the market.
