The National Australia Bank Ltd (ASX: NAB) share price has risen an impressive 21% in the last six months. After such a strong run, investors may wonder whether the ASX bank share is still a buy. Does it have any more upside?
When a share price rises rapidly, it increases the price/earnings (P/E) ratio and decreases the dividend yield. This 'worsening' of the valuation statistics is not appealing, but if the outlook is promising, the bank stock could still justify an investment.
Let's look at how the company's operations have been performing recently.
Earnings recap
In the FY24 first-half result, NAB reported cash earnings of $3.55 billion, down 3.1% compared to the second half of FY23. And compared to the FY23 first-half, cash earnings were down 12.8%.
NAB attributed the profit decline to several factors, including the slowing economy, competitive pressures, and a higher effective cash rate.
Because of competitive pressures, its personal banking segment suffered a significant 29.6% year-over-year decline in cash profit to $553 million.
NAB reported that its ratio of loans at least 90 days past due increased 13 basis points over a 12-month period to 0.79%. This mainly reflected "higher arrears across the Australian home lending and business lending portfolios". The credit impairment charge for the HY24 period was $363 million.
The result showed a decline in profit, so I wouldn't say the financials justified a higher NAB share price.
Is the outlook improving?
Six months ago, there were worries about elevated inflation and interest rates and what that may mean for bank loan books. Then, in the first couple of months of 2024, it seemed the inflation picture was improving.
More recently, however, headline inflation has remained stubbornly high. Not only could this mean rates stay at this level for longer, but the latest RBA minutes show the central bank has considered increasing interest rates again.
When NAB announced its HY24 result, it gave this economic outlook:
In Australia, household consumption growth slowed sharply in the second half of 2023, impacted by interest rates and cost of living pressures. This is weighing on real GDP growth which is expected to remain below-trend over the near term.
However, some relief is anticipated later this year with expected tax cuts and a forecast easing in monetary policy from November should inflation continue to moderate. Following 1.5% GDP growth over 2023, growth of 1.7% is forecast over 2024, before improving to around 2.25 % in 2025.
Pressure has eased in the labour market and wage growth is expected to slow from elevated rates in 2023. The unemployment rate is expected to continue to drift higher, peaking at around 4.5% by end 2024, but most indicators of labour demand remain healthy suggesting employment will continue to grow.
There is a mix of positives and negatives, but the economy is performing better than expected.
NAB share price valuation
The broker UBS has forecast that NAB's cash profit in FY24, FY25 and FY26 will be lower than FY23 profit amid the competitive landscape. UBS predicts NAB could generate $7 billion of net profit in FY24, compared to $7.7 billion of cash earnings in FY23.
Based on the UBS forecast, NAB's share price is valued at 15x FY24's estimated earnings.
I think NAB is one of the best ASX bank shares, but its P/E ratio seems stretched, considering the weak profit outlook for the next few years. Rising arrears are a worry for me.
If I were trying to outperform the market, I wouldn't choose to invest in the ASX bank share at this time. I believe there are better opportunities out there. If NAB shares dropped below $30, that more reasonable valuation could make it more appealing to me.
