NAB Stock Price: When to Buy?
Think about investing in National Australia Bank Ltd (ASX: NAB) or a competitor like Westpac Banking Corp (ASX: WBC)? With the NAB share price trading at $ 27.58, now is a great time to take a closer look.
NAB is one of the four largest banks in Australia in terms of market capitalization, earnings and customers. In 2020, NAB was also one of Australia’s largest business lenders, but it is also engaged in residential lending. NAB operates Ubank online only.
NAB Stock Price: When to Buy?
1. Evaluate management and workplace
For long-term investors looking to invest in large companies and own them for five, 10 or 20 years, at Rask we think it’s fair to say that a good work environment and a good culture of staff can lead to better retention of high quality staff and, in turn, the long-term financial success of a business.
One way for Australian investors to take a peek inside a company like National Australia Bank Ltd or Westpac Banking Corp is by using human resources / jobs websites such as To look for. Seek’s website includes corporate HR data, including things like employee reviews. According to the most recent data we pulled from NAB, for example, the overall corporate culture rating of the company of 3.2 / 5 was not as much as the industry average of 3.23.
2. Look at bank margins
ASX bank stocks like NAB need debt and good profit margins to make their business profitable. This means that a bank obtains money from term deposit holders and wholesale debt investors and lends that money to owners, 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 forecast profits from a bank like NAB or ANZ Banking Group (ASX: ANZ) Knowing how much money the bank is lending and what it earns per dollar loaned to borrowers is crucial. This is why the NIM is arguably the most essential measure of NAB’s profitability. Among the major ASX bank stocks, we calculated that the average NIM was 1.92% while the National Australia Bank Ltd bank’s line of credit was 1.77%, noting that it generated a below average loan performance compared to its peer group. This can happen for many reasons, which are worth investigating.
The reason analysts study NIM so closely is that National Australia Bank Ltd earned 80% of its total income (akin to income) just by lending last year.
3. What is ROE?
Return on equity or simply “ROE” helps you compare a bank’s profit against its total equity, as shown on its balance sheet. The highest the ROE the best. The ROE of National Australia Bank Ltd over the last full year was 6.0%, which means that for every $ 100 of bank equity it generated $ 6.00 in annual profit . This was below the industry average of 7.46%.
4. The buffer against losses
For Australian banks, the CET1 ratio (aka “common equity tier one”) is essential. CET1 represents the bank’s capital cushion that can be used to protect it against financial collapse. According to our figures, National Australia Bank Ltd had a CET1 ratio of 11.4%. It was less than the industry average.
5. Rough valuation of NAB actions
A dividend discount or DDM model is one of the most effective ways to create an ASX bank stock prediction. To do a DDM, we need to come up with a forecast of the bank’s dividends going forward (i.e. the next full year dividend) and then apply a risk score. Suppose the NAB dividend payment increases at a constant rate every year in 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 $ 1.12 per share, which is the preferred measure because it uses expected dividends, the valuation rises to $ 19.03. The valuation compares to the current NAB stock price of $ 27.58. Since the company’s dividends are fully franked, we may make an additional adjustment and valuation based on a “gross” dividend payment. Using gross dividend payments, which account for postage credits, the valuation is estimated at $ 27.19.
This means that while 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 of the risks and ideas that we have presented here, including the benefit of dividend growth and the strong impact of postage credits. Consider receiving our free investment report by email (keep reading).