The National Australia Bank Ltd (ASX: NAB) share price is now at GFC levels, currently trading at $15.99. Could the share price slump be a long-term buying opportunity?
Half Year Results and Capital Raising
The NAB half-year results and capital raising provided much needed insight into the state of the banking sector and the Australian economy.
The company's financial performance reflected the struggling Australian economy. Cash earnings fell 24.3% and underlying profit was down 8.1% (excluding large notable items).
NAB also said it expects unemployment will rise sharply to 11.7% by June and progressively reduce in 2021. Australia should anticipate a strong GDP rebound in Q4 but some sectors will face longer-term impacts and structural changes.
The company also shared data regarding the change in payment inflows by industry for the month of April 2020 compared to April 2019. Most notable declines include an almost 70% slide in accommodation & food services, a 50% drop in arts & recreational services and transport, retail & manufacturing all falling approximately 30%.
The $3bn capital raising seeks to provide an additional buffer to assist with credit losses and risk-weighted asset increases which could occur under a range of scenarios including a severe and prolonged downturn. The sheer size of the capital raising and 8.5% discount to its closing price pre-capital raising will place even greater headwinds on the NAB share price.
The alternative option to raising capital can be demonstrated by the likes of Australia and New Zealand Banking Group Ltd (ASX: ANZ) which opted to defer its interim dividend. There is nothing wrong with either option. One bank simply chose to maintain a lower dividend at the cost of share dilution, while the other opted to use the money it would save from not paying dividends.
Is the NAB share price a buy?
NAB noted that Australia's GDP is expected to rebound in Q4 and will be back to 'pre-COVID-19' levels by early 2022.
While I can agree that the economy will experience a strong rebound following the easing of lockdown measures, it is too early to tell the medium-long term economic repercussions.
Today's unprecedented environment makes it increasingly challenging to make forward looking statements. The ASX banks' earnings have clearly been rocked by COVID-19 and they will no longer be the dividend paying giants they once were.
What can be said, is that the banks possess 'unquestionably strong' capital targets. They are within the range identified as being sufficient to withstand most historical episodes of financial crisis globally.
I believe there is too much uncertainty for ASX banks' earnings moving forward, significant impairment costs, and lower/no dividends.
While the big four banks may be cheap from a historical standpoint, I would sit on my hands for more economic certainty.
