Does the NAB (ASX:NAB) share price make it the best value bank right now?

NAB shares have outperformed recently. Is it the best value bank?

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Key points

  • The NAB share price has performed strongly over the last year
  • NAB is investing in technology and efficiencies to improve customer service and lower loan processing times
  • Institutional investors like the quality that the bank is displaying

The National Australia Bank Ltd (ASX: NAB) share price has gone up by 17% over the last year. This is sound outperformance of the S&P/ASX 200 Index (ASX: XJO) which has only risen 5.5% in the last year.

NAB has been going through a turnaround strategy with a fairly new leadership duo in place, both the CEO and chair.

What is helping the NAB share price deliver outperformance?

The bank is focused on improving both its business banking and home lending.

It’s investing in its small and medium business banking segment, as well as its business and private banking division, to grow by delivering differentiated and better banking experiences for customers and colleagues.

One of the things it’s doing in the business banking side is embedding performance disciplines. It’s also increasing its focus on simplifying, automating and digitising to provide faster, more seamless banking experiences. It is also leveraging data and analytics to provide insights, more personalised experiences and faster decisioning.

In FY21, small and medium business lending increased by 7%. Its market share in both SME and agricultural lending improved over the year.

In home lending it’s a similar story where it is increasingly simplifying and digitising the experience. During FY21, it simplified and streamlined its home lending policies, rollout digital application and decisioning tools and improved the ability for customers to self-serve through the NAB app.

These initiatives are delivering quicker, better outcomes for customers and colleagues despite there being a significant increase of application volumes. Unconditional approval times are approximately 30% faster.

In FY21, NAB delivered $6.56 billion of cash earnings, an increase of 76.8%. This was up 38.6% compared to FY20 excluding the FY20 large notable items.

After such a big profit increase, is the NAB share price now the best value bank?

Bank valuations

To keep the comparable bank valuations simple, these are the following estimates for FY23 on Commsec.

The Commonwealth Bank of Australia (ASX: CBA) share price is valued at 18x FY23’s estimated earnings.

The Westpac Banking Corp (ASX: WBC) share price is priced at 11x FY23’s estimated earnings.

NAB shares are valued at 13x FY23’s estimated earnings.

The Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price is valued at 12x FY23’s estimated earnings.

So, whilst NAB may have a fairly low price/earnings ratio for FY23, it is not quite as low as Westpac and ANZ.

However, some investors are fans of the work that NAB is doing.

Is the NAB share price the best value bank?

Being the cheapest may not necessarily mean the best value.

Ord Minnett rates NAB as its favourite in the banking sector and rates it as a buy with a price target of $31.50. That’s more than 10% higher than where it is now.

The managers of WAM Leaders Ltd (ASX: WLE) also prefer NAB as the choice for big bank exposure due to its capital management team, a sector-leading business bank taking market share, further progressed cost management initiatives than peers, and its strong capital position.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. 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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