The National Australia Bank Ltd (ASX: NAB) share price has been trending lower in recent weeks. It's down by 6% since 2 November 2022. For a large S&P/ASX 200 Index (ASX: XJO) bank share in a rising interest rate environment, I think that's a noticeable drop.
Over that same time period, the ASX 200 has gone up by 2.4%. So, that's a sizeable bit of underperformance.
However, I think that the period of underperformance could make it an attractive time to consider the NAB share price for these three reasons.
Savvy management
The management team at NAB are a quality group, in my opinion. They have done an excellent job of turning the company around.
Decisions made by the business have led to the bank reporting solid numbers. In the FY22 result it revealed 8.3% growth of cash earnings to $7.1 billion. Underlying profit growth was 11.5%.
NAB noted that this result was achieved through its strategy, including targeted volume growth and a disciplined approach to managing costs while investing for growth.
The CEO said that an ongoing focus on strong balance sheet settings has been "key to delivering sustainable growth and keeping the bank safe".
I like how the bank is positioned going into this period where households could see elevated mortgage stress. At the end of FY22, it had a group common equity tier 1 (CET1) ratio of 11.5%.
NAB CEO Ross McEwan said:
Maintaining these settings is important during the current economic uncertainty, with higher interest rates and higher inflation likely to challenge some customers. However, strong employment conditions along with substantial household and business savings give us confidence in the resilience of our customers and the broad economy.
We will continue to remain focused on the disciplined execution of our strategy to support sustainable growth in earnings and shareholder returns over time.
Interest rates are rising
Central banks have been hiking interest rates to try to take the steam out of the economy.
The Reserve Bank of Australia (RBA) interest rate has jumped from 0.10% to 2.85%. Though, it could go even higher from here.
ASX bank shares like NAB, Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have been passing on the interest rate hikes to mortgages faster than for savers.
Due to this, I think that NAB's lending profit can increase. The net interest margin (NIM) – the lending profitability that compares the lending rate against the cost of the funding (such as term deposit) – is increasing for NAB.
NAB said that in the fourth quarter of FY22 it achieved a NIM of 1.72%, which was up 10 basis points (or 0.10%) compared to the third quarter. This is good for ongoing profitability.
However, I think we should remain aware of the potential for higher arrears and bad debts with borrowers.
Dividend outlook for investors holding NAB shares
NAB has been growing its dividend for shareholders, which means increasing cash returns from the business.
In FY22 the ASX bank share grew its total annual dividend by around 19% to $1.51 per share. That currently represents a grossed-up dividend yield of 7%.
In FY23, CommSec has estimated an annual dividend of $1.72 per share for NAB, which equates to a grossed-up dividend yield of 8%.
The grossed-up dividend yield in FY24 could be around 8.3% according to CommSec.
NAB's dividends alone could provide a solid return for shareholders over the next couple of years.
