The ASX bank share National Australia Bank Ltd (ASX: NAB) is known for having a solid dividend yield. I'd say the bank has elevated its quality level in the last few years thanks to the stewardship of Ross McEwan in the years after the banking royal commission.
However, McEwan recently left the bank and it's facing an uncertain period amid high interest rates, rising arrears and strong competition which is hurting the net interest margin (NIM).
Let's look at some of the key areas for the bank and whether it's an opportunity following the 33% rise of the NAB share price over the past year.
Rising arrears and falling NIM
One of the worst things for a bank is people not paying their loan repayments. It increases the danger of the loan going 'bad', potentially requiring the bank to write off some of the loan. Of course, rising house prices help mitigate the danger of bad debts.
The latest update from NAB was the FY24 first-half result, which showed that the percentage of loans that were at least 90 days past due was 0.79%, up from 0.75% in the second half of FY23 and 0.66% from the first half of FY23. That's not a promising trend.
However, NAB did say that the "Australian economy is proving resilient and most customers are faring well in the current more challenging environment."
Year over year, the net interest margin decreased by 5 basis points in the HY24 result. Within that net movement of the NIM, NAB said there was a 12 basis point increase in the lending margin primarily due to "competitive pressures in the housing lending portfolio". It benefited from higher earnings on its capital due to the higher interest rate environment.
Dividend yield
NAB is projected to pay an annual dividend per share of $1.68 in FY24, which translates into a forecast fully franked dividend yield of 4.4% and a grossed-up dividend yield of 6.3%.
That's better than what someone can get from a term deposit. However, the yield isn't that exciting after the significant rise of the NAB share price in the last year (which consequently pushes down the yield on offer).
Profit to grow?
One of the main things I want to see from a company is rising net profit after tax (NPAT) over time because that's what funds higher dividend payments and encourages investors to pay more for the business.
The broker UBS suggests that NAB could generate $7.04 billion in FY24, and then profit is projected to increase in each of the subsequent financial years.
It's projected to make a net profit of $7.15 billion in FY25, $7.27 billion in FY26, $7.5 billion in FY27 and $7.76 billion in FY28.
That isn't a huge growth rate, but (projected) improvement is better than a decline.
My view on whether NAB shares are a buy
I believe NAB is one of the top banks in Australia, and it's good to see that profit is likely to keep rising over time.
However, the rapid increase of the ASX bank share's valuation and predicted slow growth makes me hesitant to be bullish on NAB shares. According to UBS' forecasts, the bank is currently valued at 17x FY25's estimated earnings. I'd wait for a better price-earnings (P/E) ratio before considering investing.
