National Australia Bank Ltd (ASX: NAB) shares have seen plenty of ups and downs this year. In this article, I'm going to consider whether now is a good time to look at investing in the ASX bank share.
NAB has been doing a good job of growing its profit over the last year, and this is playing out in the financials. With that in mind, let's look at the positives of the bank.
Positives for NAB shares
One of the main things that investors look for from most businesses is profit growth.
The bank has been doing well on this front, although we could suggest that NAB should be delivering even more profit growth.
In the three months to June 2023, it delivered a statutory net profit of $1.75 billion and cash earnings of $1.9 billion. The cash earnings represented year-over-year growth of 5.8%, or 16% growth of cash earnings before tax and credit impairment charges.
NAB CEO Ross McEwan said that growing its small and medium enterprise (SME) division remained a priority. In the FY23 third quarter, SME lending rose by 4%. However, I like that the bank has remained disciplined in the competitive Australian home lending market, with growth of 1%, which was below the overall lending system.
NAB has focused on delivering productivity, the "key" to helping the bank manage inflation impacts while still investing in its key priorities. It's targeting productivity savings of approximately $400 million in FY23.
The banks is still expected to pay large dividends. According to Commsec, the business could pay an annual dividend per share of $1.67 in both FY23 and FY24. This would represent a grossed-up dividend yield of 8.4%, which is still far superior to what NAB might pay on one of its term deposits.
The $1.5 billion share buyback is also a helpful boost to shareholder returns.
And the negatives…
Not everything is going right for NAB shares, though. While profitability is much higher year over year, it's challenged compared to the first half of FY23.
FY23 third quarter cash earnings before tax and credit impairment charges declined 5% compared to the FY23 first half quarterly average. It said gross lending was broadly flat, with growth in housing and Australian SME business lending offset by lower corporate and institutional volumes.
Revenue declined 2%, with the net interest margin (NIM) declining 5 basis points to 1.72%. This reflected "continued home lending competition combined with higher deposit costs". Expenses were up 3% with higher staff-related costs and continued investment in technology, partly offset by productivity benefits.
I think there's a fair chance that arrears will keep rising over the next few months unless interest rates start coming down soon, with some borrowers now struggling, as shown by the arrears reported by other large bank shares, such as Commonwealth Bank of Australia (ASX: CBA).
The 10% rise in the NAB share price over the last two months is pleasing for shareholders, but it now means that the ASX bank share is not as good value as it was.
Commsec projections suggest that the ASX bank share's earnings per share (EPS) could fall to $2.20, which would mean that the business is valued at 13x FY24's estimated earnings. Time will tell how accurate that forecast is and whether that's a good price.
Foolish takeaway
All the banks are talking about a competitive environment. It's probably a good thing that NAB is being conservative with its lending, but it's hard to say at this stage when the competition will lessen.
The thing is, lenders don't need a branch network any more, online banking and digital operations have changed the sector. Just look at how Macquarie Group Ltd (ASX: MQG) has muscled into the sector.
I'm not sure that banks will be able to earn the margins that they used to several years ago, but out of all of the domestic ASX bank shares, NAB is currently my preferred pick when taking into account its experienced CEO, the lending settings, overall quality and valuation.
But, it wouldn't be among my current top 10 ASX dividend share picks due to that competition and limited long-term growth potential.
