The National Australia Bank Ltd (ASX: NAB) share price may have surprised many investors in 2024 by producing a 19% return to date. It was actually up 30% this year on 22 November 2024 but has fallen back since.
It'd be understandable for shareholders to be ecstatic about the returns this year. But what are prospective investors supposed to do?
It's exciting to own shares that have momentum. When good earnings growth is happening, share price growth can continue for a long time.
Sometimes, share prices can climb even if there isn't earnings growth because investors may be more willing to pay higher earnings multiple for a business, which is called the price-earnings (P/E) ratio.
NAB share P/E ratio rises
How much profit growth in FY24 would you expect to have caused the NAB share price to rise 18% this year? Somewhere between 10% to 20% profit growth?
In the recently released FY24 result, NAB reported statutory net profit after tax (NPAT) declined 6.1% to $6.96 billion, while cash earnings dropped 8.1% to $7.1 billion.
Gross loans and advances (GLAs) increased by 4.2%, and deposits increased by 4.3%. However, revenue decreased by 2%, mainly because of a lower net interest margin (NIM). The NIM tells investors what lending profit margin a lender is making, taking into account the loan rate and the funding of the loans (such as term deposits and savings accounts).
NAB's NIM was influenced by home lending competition, higher term deposit costs, and deposit mix impacts.
Due to the rise of the NAB share price and the fall of the profit, the ASX bank share is now valued at around 16x FY24's earnings. Broker UBS notes that NAB shares are trading materially higher than the historical average.
Could the bank boost profit?
UBS thinks NAB's profit is only going to rise a small amount to $7.25 billion in FY25. The broker thinks the ASX bank share needs to do a few things to improve its performance.
For example, it was suggested the bank needs to improve its customer satisfaction score and make "make greater inroads into gaining further market share in household deposits in 2025." NAB is increasing its investment in digital, data, and analytics to support customers and bankers.
UBS also said NAB's mortgage strategy is "more urgent now". NAB has successfully returned its mortgage flow rates back to its lending market share, which the broker views as a positive.
The broker also pointed out that NAB's financial and operating success comes from business banking, where it has a 21% market share and contributed 43% of NAB's earnings. However, there are "structural headwinds underway", with increased competition and capital targeted for this sector.
In terms of possible interest rate cuts, NAB is expecting rate cuts in the next few months, but each 25 basis point cut on Australian low-rate sensitive deposits would hurt the NIM by 1 basis point (0.01%), according to UBS.
Rating on NAB shares
UBS has a sell rating on NAB shares, with a price target of $37.50.
My colleague Bernd Struben recently reported on commentary from Bell Potter Securities' Christopher Watt, who also has a sell rating on the bank:
While cost efficiencies offset marginally higher bad debts and softer revenue, the bank's premium valuation looks vulnerable. Modest net interest margin pressure and rising non-performing exposures highlight risk.
In this environment, NAB's upside appears limited, while selling protects against potential downside.
I don't think this is the right time to invest in the ASX bank share. It's starting from a high valuation, house prices are falling in Sydney and Melbourne (increasing the risk of bad debts), competition remains strong, and earnings growth is expected to be slow.
I'm not looking at major banks as opportunities.
