Is the National Australia Bank Ltd (ASX: NAB) share price a buy? It has risen by 10% this month, can the gains continue?
The outlook is improving for banks
Share prices are forward looking. If investors are expecting better things going into the future then they will push the NAB share price higher.
There have been a few key developments in recent weeks that should help NAB's earnings over the medium-term. The federal budget looks supportive for the economy, particularly with tax cuts. If the economy is doing better then the major banks should beneficiaries.
The removal of responsible lending laws may help major banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) to get more credit to potential borrowers. A bigger loan book could mean higher profits, as long as bad debts don't rise.
However, there is still a question about what's going to happen with bad debts.
The NAB FY20 third quarter trading update saw a credit impairment charge of $570 million and the percentage of loans that are 90 days (and more) past due continues to rise each quarter. This isn't a very good sign for the bank. However, it was pleasing to see that NAB generated $1.5 billion of statutory net profit and $1.55 billion of cash earnings. It's still making a lot of money, despite the difficulties.
NAB's improving balance sheet
The big bank continues to have a good balance sheet. Indeed, at the end of the third quarter it had a CET1 capital ratio of 11.6%. It also recently announced that it was going to sell MLC Wealth to IOOF Holdings Ltd (ASX: IFL) for $1.44 billion. That's a solid amount of extra cash for the balance sheet. Stepping away from wealth management is probably a good idea.
So, it's a good time to buy NAB shares?
NAB's share price and the other banks could continue to rise in the short-term if Australia's economy and COVID-19 situation continues to remain in control.
There is more positive news coming out than negative news. The outlook for Australian house prices is improving as well, largely because of the factors I've already mentioned (lower taxes, a good COVID-19 situation and easier lending laws). Though there are still some reputation hits from the Hayne royal commission. NAB is going to have to pay $15 million for its referral program that broke the law, according to the BusinessInsider.
I think banks are in for a mixed bag over the next couple of years. There may be higher lending growth, but there could also be higher bad debts if all the loan payment holidays don't all return to making normal payments.
NAB may not be a terrible shorter-term idea today, it's just that I think there are plenty of other ASX shares I'd rather buy first.
Which ones?
In terms of other financial businesses, I think that something like Magellan Financial Group Ltd (ASX: MFG) could be an idea. Magellan is still growing its funds under management (FUM) at an attractively good pace. The fund manager provides investors with exposure to global shares, which is the key strategy.
Magellan is making a number of interesting investments into new businesses. One example is Barrenjoey, a new Australian investment bank.
The upcoming launch of a retirement product could also be really beneficial for FUM in the coming years.
Magellan continues to steadily grow its ordinary dividend, which makes it a solid ASX dividend share in my opinion. At the current Magellan share price it offers a grossed-up dividend yield of 5%. I think Magellan has much better returns prospects than the NAB share price does at the moment.
Other ASX dividend shares I'd be happy to consider include Future Generation Investment Company Ltd (ASX: FGX), Brickworks Limited (ASX: BKW) and Pacific Current Group Ltd (ASX: PAC).
