NAB is one of Australia’s four largest banks in terms of market capitalisation, profits and customers. NAB is also one of Australia’s largest lenders to businesses. However, according to APRA banking statistics it also has a strong presence in residential lending (mortgages, personal loans, etc.). NAB also owns Ubank, the online-only and low-cost bank brand. 

NAB share price

HR matters

For long-term investors looking to invest in great companies and hold them for 5, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and staff culture can lead to improved retention of high-quality personnel and, in turn, long-term financial success of a company.

One way Aussie investors can get under the hood of a company like National Australia Bank Ltd or Westpac Banking Corp is to use a HR/jobs website such as Seek. Seek’s website includes data on the culture of companies, including things like employee reviews. According to the most recent data we pulled on NAB, for example, the company’s overall workplace culture rating of 3/5 was less than the sector average of 3.13.

NAB’s profits on loans

ASX bank shares such as NAB need deposits and good profit margins to make their business profitable. Meaning, a bank gets money from term deposit holders and wholesale debt investors and lends that money to homeowners, businesses and investors. The difference between what a bank pays to savers and what it makes from 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 are planning to calculate the profits of a bank like NAB or ANZ Banking Group (ASX: ANZ), knowing how much money the bank lends and what it makes per dollar lent to borrowers is crucial. That’s why the NIM is arguably the most crucial measure of NAB’s profitability. Across the ASX’s major bank shares, we calculated the average NIM to be 1.92% whereas National Australia Bank Ltd’s lending margin was 1.77%, highlighting it delivered a lower-than-average return from lending compared to its peer group. This may happen for many reasons, which are worth investigating.

The reason analysts study the NIM so closely is because National Australia Bank Ltd earned 80% of its total income (akin to revenue) just from lending last year.

ROE: the measure of bank quality

Return on shareholder equity, also known as ‘ROE’, helps you compare the profit of a bank against its total shareholder equity, as shown on its balance sheet. The higher the ROE the better. National Australia Bank Ltd’s ROE in the latest full year stood at 12.9%, meaning for every $100 of shareholder equity in the bank it produced $12.90 in yearly profit. This was above the sector average of 10.43%.

Balance sheet protection

For Australia’s banks the CET1 ratio (aka ‘common equity tier one’) is paramount. CET1 represents the bank’s capital buffer which can go towards protecting it against financial collapse – basically, it’s the proportion of total assets that are ‘liquid’ or readily available. According to our numbers, National Australia Bank Ltd had a CET1 ratio of 12.15%. This was above the sector average.

NAB share price valuation

A dividend discount model or DDM is one of the most efficient ways to create a prediction of ASX bank shares. To do a DDM we have to arrive at a prediction of the bank’s dividends going forward (i.e. the next full-year dividend) and then apply a risk rating. Let’s assume the NAB dividend payment rises at a consistent rate each year into the future, somewhere between 2% and 4%. We will use multiple risk rates (between 6% and 11%) and then average the valuations.The calculation we use is Share price = full-year dividend / (risk rate – dividend growth rate).

According to this quick and simple DDM model, an estimated valuation of NAB shares is $28.38. However, using an ‘adjusted’ or expected dividend payment of $1.69 per share, which is the preferred measure because it uses forecast dividends, the valuation goes to $28.72. The valuation compares to NAB’s current share price of $37.01. Since the company’s dividends are fully franked, we can make a further adjustment and do a valuation based on a ‘gross’ dividend payment. Using gross dividend payments, which take into account franking credits, the valuation prediction becomes $41.03.

What this means is that the NAB share price might seem expensive using our simple DDM model, but this is just one of many steps you should take before making an investment decision. It’s important to consider all of the risks and ideas we presented here, including the benefit of increasing dividends and the strong impact of franking credits. To learn more about analysis and valuation, consider getting our free investment report emailed to you (keep reading).