The National Australia Bank Ltd (ASX: NAB) share price has risen impressively over the past year, going up by well over 30%, as shown on the chart below.
However, some experts now think the ASX bank share could be in danger of decline.
Just because something has risen doesn't necessarily mean it's going to drop down again. Banks are not ultra-cyclical businesses – their borrowers are (largely) paying them a payment every month.
The Australian recently shared some stock tips from two experts. Both of them called NAB shares a sell and suggested the bank is more vulnerable than Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and ANZ Group Holdings Ltd (ASX: ANZ) if the economy goes through a downturn.
Weakening economic indicators
The Australian reported that Bell Potter's private client adviser, Chris Watt, called NAB shares a sell. He said the recent NAB result "met expectations", but rising costs, net interest margin (NIM) pressure and increased non-performing exposures (loans) were a worry.
As a reminder, in that FY24 result, NAB revealed that statutory net profit declined 6.1% to $6.96 billion, and cash earnings fell 8.1% to $7.1 billion.
When you drill down into those headline numbers, expenses rose 4.5% because of higher personnel costs related to wage increases and restructuring-related costs, as well as ongoing investment in technology modernisation and compliance capabilities.
The NIM is a measure that shows a bank's profit margin on its lending (including the cost of funding, such as savings accounts). NAB's FY24 core NIM declined by 6 basis points primarily because of lending competition, higher term deposit costs, and deposit mix impacts.
NAB also reported that the ratio of non-performing exposures compared to its total loan book increased by 26 basis points (0.26%) year over year to 1.39%. This reflected higher Australian mortgage arrears and a deterioration in its business lending portfolio.
Valuation sustainability
Under the current circumstances mentioned above, Bell Potter adviser Chris Watt suggested the current NAB share price raises "concerns about valuation sustainability". It's not exactly normal for the NAB share price to rise by close to 40% in one year.
According to Commsec, the ASX bank share is forecast to generate earnings per share (EPS) of $2.48 in FY25. That puts the current valuation at approximately 16x FY25's estimated earnings.
Business mix
The Australian also reported that CC Equities director Sean Conlan called NAB shares a sell.
Not only is NAB facing a slowing economic environment, but CC Equities believes NAB's business mix is "vulnerable", which could cause the NAB share price to fall further than its peers, CBA, ANZ, and Westpac.
NAB generates a larger percentage of its profit from business banking than banks like CBA and ANZ. In FY24, NAB made divisional cash earnings of $3.26 billion from business and private banking, $1.77 billion from corporate and institutional banking, $1.17 billion from personal banking and $1.44 billion from New Zealand banking.
If the business sector suffers, then NAB could be exposed.
