When it comes to ASX bank stocks, knowing what’s or what is not — a fair price to pay National Australia Bank Ltd (ASX:NAB) Shares can seem a little daunting, especially in today’s environment. In this short article on NAB stocks, we will look at the main factors to consider when looking for a bank stock.
NAB is one of the four largest Australian banks by market capitalization, earnings and customers. In 2020, NAB was also one of Australia’s largest lenders to businesses, but it also has a residential lending business. NAB operates Ubank online only.
NAB’s stock price looks good with its dividend, right?
Culture Assessment at National Australia Bank Ltd
For long-term investors looking to invest in great companies and hold them for five, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and a good staff can lead to better retention of high quality staff and, in turn, the long term financial success of a company.
One way for Australian investors to peek inside a company like National Australia Bank Ltd or Westpac Banking Corp is to use HR/jobs websites such as To look for. Seek’s website includes company human resources data, including things like employee reviews. According to the most recent data we pulled from NAB, for example, the overall workplace culture rating of 3.2/5 was less than the industry average of 3.23.
Are NAB loans profitable?
ASX bank stocks such as NAB need debt and good profit margins to make their business profitable. This means that a bank receives money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank is pay to savers and what made of mortgage holders (for example) is the net interest margin or NIM. Remember: when it comes to NIMs, the wider the margin, the better.
If you plan to calculate the profits of a bank like NAB or ANZ Banking Group (ASX: ANZ), it is crucial to know how much money the bank lends and what it earns per dollar lent to borrowers. This is why the NIM is arguably the most crucial measure of NAB’s profitability. Among major ASX banking stocks, we calculated the average NIM to be 1.92%, while National Australia Bank Ltd’s lending margin was 1.77%, highlighting that it offered a below-average loan performance relative to its peer group. This can happen for many reasons, which are worth investigating.
The reason analysts are studying the NIM so closely is that National Australia Bank Ltd earned 80% of its total revenue (income-like) from loans alone last year.
Return on equity (using balance sheet)
Return on equity or simply “ROE” helps you compare a bank’s profit to its total equity as shown on its balance sheet. The highest the RE the best. National Australia Bank Ltd’s ROE over the last full year was 6.%, meaning that for every $100 of bank equity it generated $6.00 in annual profit . This figure was lower than the industry average of 7.46%.
NAB’s capital structure
For Australian banks, the CET1 ratio (aka “common equity tier one”) is essential. CET1 represents the bank’s capital buffer that can help protect against financial collapse. According to our figures, National Australia Bank Ltd had a CET1 ratio of 11.4%. This was below the industry average.
Dividends and valuation for banks like NAB or ANZ
A Dividend Discount Model or DDM is one of the most effective ways to create an ASX bank stock prediction. To do a DDM, we need to arrive at a forecast of the bank’s dividends in the future (i.e. the next dividend for the full year) and then apply a risk rating. Assume that NAB’s dividend payment increases at a constant rate each year into the future, somewhere between 2% and 3%. We will use multiple risk rates (between 6% and 11%) and then average the valuations.
According to this quick and easy DDM model, a valuation of NAB shares is $10.20. However, using an “adjusted” or expected dividend payment of $1.23 per share, which is the preferred metric because it uses expected dividends, the valuation jumps to $20.90. The valuation compares to the current NAB share price of $30.61. Since the company’s dividends are fully franked, we can make an additional adjustment and make a valuation based on a “gross” dividend payment. Using gross dividend payments, which factors in franking credits, the valuation forecast at $29.86.
This means that although the NAB stock price may look expensive using our simple DDM model, do not make a decision based on this article. Please go now and consider all the risks and ideas we have presented here, including the benefit of increased dividends and the high impact of postage credits. Consider receiving our free investment report by email (keep reading).