Is the NAB (ASX:NAB) share price a buy?

Is the National Australia Bank Ltd (ASX:NAB) share price a buy? There’s at least one fund manager that thinks the bank is worth buying.

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NAB Shares

There is at least one fund manager that thinks the share prices of big banks like National Australia Bank Ltd (ASX: NAB) are a buy.

Fund manager Rhett Kessler recently revealed that his Australian share fund from Pengana Capital Group Ltd (ASX: PCG) was increasing exposure to the major ASX banks.

What has NAB recently announced?

A month ago the big four ASX bank announced its FY20 result. There were various different profit measures to look at, but they all showed a double digit profit decline.

NAB’s cash earnings fell by 36.6% to $3.71 billion. Excluding large notable items, cash earnings fell by 25.9%. Statutory net profit after tax dropped 46.7% to $2.56 billion.

During the year, the big bank suffered a 201% increase of credit impairment charges to $2.76 billion. As a percentage of gross loans and acceptances, the ratio worsened from 31 basis points to 46 basis points. This included an allocation for targeted sectors experiencing elevated levels of risk including aviation, tourism, hospitality and entertainment, retail trade and commercial property.

NAB also said that the ratio of loans that are more than 90 days past due increased by another 10 basis points to 1.03% largely due to rising delinquencies in the Australian home loan portfolio where customers are not part of the COVID-19 deferral program. Eligible customers receiving COVID-19 payment deferrals are treated as performing in accordance with APRA guidance.

The net interest margin (NIM) declined by 1 basis point to 1.77%. However, excluding a 1 basis point reduction from ‘markets and treasury’ which includes the impact of holding higher liquid assets, NIM was flat with the benefits of home loan repricing and lower wholesale funding costs offset by impacts of the low interest rate environment combined with competitive pressures.

However, excluding all the ‘one-offs’, revenue was only down 1.5% and expenses only grew by 2%. Expenses went up because of its refresh strategy, higher technology costs (including strengthening its compliance and control framework), salary increases and COVID-19 costs. However, these were offset by productivity benefits, lower performance-based compensation and reduced travel and entertainment costs.

What has the NAB share price done?

Like most other ASX shares, the NAB share price has been recovering since March 2020. However, it has recovered at a different pace. It didn’t really do much between June and September. But since the start of October 2020 the NAB share price has gone up by 30%.

In that time the result of the US election and the results of COVID-19 vaccine trials have made headlines.

Why Pengana likes big banks

There are a few different areas about why Pengana thinks that the big four ASX banks look interesting.

Whilst valuation has been broadly supportive for some time now, the outlook for the banks benefited in particular through the month by evidence of accelerating home loan growth (supported by low-interest rates and first homeowner support), a supportive federal budget; improving housing finance approvals; house prices holding up better than expected, a meaningful reduction in loan deferrals and lower than anticipated loss provisioning.

What is NAB’s valuation?

At the current NAB share price it’s valued at under 14x FY23’s estimated earnings according to Commsec projections. In FY23 it’s also predicted to pay a dividend of $1.16 per share, which equates to a grossed-up dividend yield of 7.2%.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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