National Australia Bank Ltd (ASX: NAB) shares have underperformed compared to other major ASX bank shares over the past year.
In the last 12 months, the NAB share price has fallen by around 5%. Let's check the performance of the other major banks.
The Commonwealth Bank of Australia (ASX: CBA) share price has risen around 6%.
The Westpac Banking Corp (ASX: WBC) share price is up 0.1%.
Finally, the ANZ Group Holdings Ltd (ASX: ANZ) share price has gained 11%.
Considering they're all from the same sector, that's quite a variance in performance.
However, past performance isn't necessarily indicative of future performance. Meaning NAB may have demonstrated underperformance in the last 12 months but the next period (say 12 months) could be better.
With that in mind, I'm going to point out a few factors that could mean NAB shares will do well.
Cautious settings
The latest update we heard from the bank was its FY23 third-quarter result, which saw the ASX bank share generate $1.9 billion of cash earnings. That represented 5.8% year-over-year growth, while cash earnings before tax and credit impairment charges increased 16%.
However, compared to the quarterly average in the first half of FY23, cash earnings before tax and credit impairment charges declined 5%.
After Australia's run of interest rate increases, the economy now has an uncertain outlook. But I like that NAB is staying conservative with its banking settings. As at 30 June 2023, it had a group common equity tier 1 (CET1) ratio of 11.9%, which is very healthy.
Upon the quarterly announcement, NAB CEO Ross McEwan said:
Consistent with our strategy, we are focused on keeping our customers and our bank safe and maintaining prudent risk and balance sheet settings. Capital levels remain healthy even after allowing for our latest on-market share buyback announced today. Liquidity and collective provision coverage are strong and we raised $37 billion of term funding by end July.
Business bank focus
I like that NAB has a much larger focus on business banking than many other banks, with its business lending and household lending levels being fairly similar (at more than $100 billion each). If households start suffering due to the cost-of-living crisis, then NAB's loan book could outperform if corporate lending performs more strongly.
In the FY23 half-year result, the bank reported that its personal banking cash earnings declined 0.4% to $785 million. At the same time, its business and private banking division grew cash earnings by 19.9% to $1.7 billion and corporate and institutional banking cash earnings rose 16.6% to $940 million.
I thought this level of profit growth was impressive considering the difficult banking environment. Hopefully, the corporate side of the business can keep performing.
Reasonable valuation
After the NAB share price decline, I believe the bank is now at a very reasonable price.
According to Commsec, it's projected that NAB could make earnings per share (EPS) of $2.48. This forecast, if correct, would put the NAB share price at 13x FY24's estimated earnings.
The CBA share price is valued at 18x FY24's estimated earnings, the Westpac share price is valued at more than 11x FY24's estimated earnings, and the ANZ share price is valued at over 11x FY24's estimated earnings.
I view NAB as higher quality than Westpac and ANZ at the moment, particularly due to its very capable management team. But NAB is a lot cheaper than CBA shares on an earnings multiple basis.
Strong dividend yield and share buyback
I like that NAB is trying to boost shareholder returns by buying back up to $1.5 billion of its shares. This can support the NAB share price because it means the value of the company is being divided between fewer shares.
Commsec estimates for NAB suggest a possible dividend per share of $1.68 in FY24. This implies a potential grossed-up dividend yield of 8.4%. The dividend income alone could be a solid return in FY24.
