The National Australia Bank Ltd (ASX: NAB) share price is up 3.4% after the big bank reported its FY19 result.
Unlike Westpac Banking Corp (ASX: WBC) which saw a decline in its underlying cash earnings, NAB managed to increase its underlying cash profit (excluding notable items, meaning essentially the customer remediation) by increasing it by 0.8%, although actual cash earnings fell 10.6%.
This could be one of the first signs that the direction NAB’s leadership is taking the bank is working. Philip Chronican is currently overseeing the bank as both the chairman and acting CEO until Ross McEwan becomes the next CEO after ending his stint at Royal Bank of Scotland.
There are big question marks about how profitable banks can be in the current environment. A bank’s net interest margin (NIM) is the rate a bank is lending out money compared to funding costs. NAB’s NIM fell to 1.78% during FY19.
Banks can’t send transaction account interest rates lower. They can’t send savings account rates much lower. So each reduction of interest rates by the RBA largely means a lower NIM for the banks like NAB.
There’s also public scrutiny of the discount that new borrowers are getting compared to existing borrowers which may or may not cause interest rates to fall lower.
NAB decided to cut the final dividend to $0.83 to per share. Despite that, NAB still offers a grossed-up dividend yield of 8.2%. It’s not nice getting an income cut, but it will support NAB’s balance sheet and hopefully help the bank actually grow profit in the future.
Australia’s housing market is showing signs of a strong recovery which should help reduce the risks of bad debts for NAB and it may also boost credit growth for the overall system.
In my opinion the competitive and margin pressures remain for NAB, so although it’s trading at under 13x FY20’s estimated earnings I certainly don’t think it’s a clear bargain. There’s a lot of potential outcomes where NAB doesn’t produce solid returns, so I think there are better opportunities.
The post Is the NAB share price a buy? appeared first on Motley Fool Australia.
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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019