The National Australia Bank Ltd (ASX: NAB) share price is up 3.4% after the big bank reported its FY19 result.
Unlike Westpac Banking Corp (ASX: WBC) which saw a decline in its underlying cash earnings, NAB managed to increase its underlying cash profit (excluding notable items, meaning essentially the customer remediation) by increasing it by 0.8%, although actual cash earnings fell 10.6%.
This could be one of the first signs that the direction NAB's leadership is taking the bank is working. Philip Chronican is currently overseeing the bank as both the chairman and acting CEO until Ross McEwan becomes the next CEO after ending his stint at Royal Bank of Scotland.
There are big question marks about how profitable banks can be in the current environment. A bank's net interest margin (NIM) is the rate a bank is lending out money compared to funding costs. NAB's NIM fell to 1.78% during FY19.
Banks can't send transaction account interest rates lower. They can't send savings account rates much lower. So each reduction of interest rates by the RBA largely means a lower NIM for the banks like NAB.
There's also public scrutiny of the discount that new borrowers are getting compared to existing borrowers which may or may not cause interest rates to fall lower.
NAB decided to cut the final dividend to $0.83 to per share. Despite that, NAB still offers a grossed-up dividend yield of 8.2%. It's not nice getting an income cut, but it will support NAB's balance sheet and hopefully help the bank actually grow profit in the future.
Australia's housing market is showing signs of a strong recovery which should help reduce the risks of bad debts for NAB and it may also boost credit growth for the overall system.
Foolish takeaway
In my opinion the competitive and margin pressures remain for NAB, so although it's trading at under 13x FY20's estimated earnings I certainly don't think it's a clear bargain. There's a lot of potential outcomes where NAB doesn't produce solid returns, so I think there are better opportunities.
