3 reasons why I think it's time to snap up NAB shares

I think that NAB is making all the right moves.

| More on:
A woman dressed in red and standing in front of a red background peers thoughtfully at a piggy bank in her hand.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • NAB's management team has steered the bank back toward profit growth and stability, in my opinion
  • Rising interest rates can help the bank earn more profit from its loans
  • It's predicted to pay large, growing dividends over the next couple of years

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.

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 Scott Phillips.

More on Bank Shares

A corporate female wearing glasses looks intently at a virtual reality screen with shapes and lights representing Block shares going up today
Bank Shares

Are Westpac shares a buy following the bank's big tech update?

Is now a good time to buy the banking giant's shares? Let's find out.

Read more »

Different Australian dollar notes in the palm of two hands, symbolising dividends.
Bank Shares

Own CBA shares? It's payday for you!

A dividend is heading to CBA shareholders’ bank accounts.

Read more »

A man holds his hand under his chin as he concentrates on his laptop screen and reads about the ANZ share price
Bank Shares

Are CBA shares really worth $120?

It has been a good year for ASX bank shareholders.

Read more »

a group of people sit around a computer in an office environment.
Bank Shares

Westpac shares push higher on $9.8b technology simplification plan

Westpac plans to spend big on technology to close the gap on its rivals.

Read more »

A worried woman looks at her phone and laptop, seeking ways to tighten her belt against inflation.
Economy

NAB boss issues dire prediction for Aussie economy

NAB’s CEO has issued a stark warning on the outlook for Australia’s economic growth.

Read more »

Contented looking man leans back in his chair at his desk and smiles.
Bank Shares

Own CBA shares? Here's the tech stock the banking giant just invested in

CBA has made an interesting investment. Here's what you need to know.

Read more »

A woman gives two fist pumps with a big smile as she learns of her windfall, sitting at her desk.
Bank Shares

ANZ shares charge higher on $57.5 million class action settlement news

ANZ shares have continued their positive run on Monday.

Read more »

Two people comparing and analysing material.
Bank Shares

Better buy: CBA or Westpac stock?

Which ASX bank share is a better buy?

Read more »