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
How analysts can study culture
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 (ASX: WBC) 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 under the sector average of 3.13.
Is lending profitable?
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 estimate 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 important 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.
Why National Australia Bank Ltd’s ROE matters
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%.
The downside in bank shares like NAB
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% last year. This was greater than the sector average.
National Australia Bank Ltd dividend valuations are handy (and pretty easy!)
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 take the bank’s last full year of dividends and then apply a risk rating. Last year the total dividend was $0.62. 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).
| Growth rate | ||||
| 2.00% | 3.00% | 4.00% | ||
|
Risk rate
|
6.00% | $15.50 | $20.67 | $31.00 |
| 7.00% | $12.40 | $15.50 | $20.67 | |
| 8.00% | $10.33 | $12.40 | $15.50 | |
| 9.00% | $8.86 | $10.33 | $12.40 | |
| 10.00% | $7.75 | $8.86 | $10.33 | |
| 11.00% | $6.89 | $7.75 | $8.86 | |
According to this quick and simple DDM model, an estimated average valuation of NAB shares is $28.38. However, using an ‘adjusted’ dividend payment (the expected future dividend) 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 $37.45. Since the company’s dividends are fully franked, we can make a further adjustment and do a valuation based on a ‘gross’ dividend payment (this is the value of the dividend including the franking credit). Using gross dividend payments, the ‘fair value’ estimate becomes $41.03.
What this means is that the NAB share price might seem expensive using the basic DDM model, but reasonable value if you can benefit from the franking credits. While NAB shares might appear to be decent value right now based on this statistical method, please don’t make a decision to buy or sell NAB shares based on this article. It’s important to consider all of the risks and ideas we presented here, including the benefit of improving 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). This should just be one of many steps when making an investment decision. Consider reading at least two or three years’ worth of National Australia Bank Ltd annual reports and then seek out good investors and analysis that disagrees with your perspective – that’s a reliable way to figure out if you’re making a solid decision based on rigorous analysis and considering alternative opinions. Finally, before going any further with NAB or WBC shares, I suggest getting a copy of our free investment report.
