National Australia Bank Ltd (ASX: NAB) shares had a tough time on Thursday.
The big four bank's shares ended the day over 1% lower at $34.40.
Why did NAB shares fall?
This weakness appears to have been driven by a broker note out of Goldman Sachs this morning.
According to the note, its analysts have been looking over the banking sector following the release of updates this month. Commenting on the updates, the broker said:
1H24 reported PPOP/cash earnings were -8%/-9% on pcp but resulted in small upgrades to our FY24E cash EPS forecasts. Four key earnings themes suggested the deterioration in bank fundamentals may be slowing: i) commercial lending pipelines are strong, ii) mortgage NIM headwinds are finding a base and deposits spreads have held up, iii) there were some signs of deteriorating asset quality but it remains better than long-run averages and asset values to support losses (and potentially provision releases), and iv) strong capital positions saw A$2.4 bn of additional capital to be distributed to shareholders versus our pre-result forecasts.
While there clearly were some positives, the broker highlights that fundamentals are weak and valuations are extreme. It adds:
Bank 12-m forward PERs are currently at the 99th percentile, our DCF valuations are 17% below current share prices, and the spread between bank fully-franked yields and the 10-year bond yield is currently at its lowest level in nearly 15 years. While bank PER relative to non-bank industrials remains c. 5% cheaper than the historic average, we think this underestimates the relative deterioration in fundamentals.
In fact, the broker warns that the banks are "close to record expensive." It adds:
To this end, a simple model that assesses bank relative to non-bank industrial fundamentals (EPS growth, ROE and franking) is currently at the third percentile and so when we adjust relative PERs for this, banks are trading at close to record expensive, i.e. 93rd percentile.
NAB downgraded
In light of the above, the broker has taken its buy rating off NAB shares and downgraded them to neutral with an unchanged price target of $34.04. This is a touch lower than where its shares are currently trading. It commented:
NAB is trading on a 12-mo forward PER of 15.4x, at the 95th percentile versus a 15-year history, and the 15-year average of 12.2x. 2. With the exception of CBA, NAB trades well above its 15-year average versus each of its peers on a 12-mo forward PER basis.
