National Australia Bank Ltd reports: Are shares good value?

National Australia Bank Ltd. (ASX:NAB) reported its full year results today. Is there an investment opportunity here?

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The shares of National Australia Bank Ltd. (ASX: NAB) will be on watch this morning after the banking giant released its full year results to the market.

Key highlights from the release include:

  • Cash earnings increased 4.2% year on year to $6.48 billion
  • Cash return on equity came in at 14.3%.
  • Statutory net profit fell 94.4% to $352 million as a result of a loss on the sale for both CYBG PLC CDI 1:1 (ASX: CYB) (the Clydesdale Bank) and 80% of NAB Wealth's life insurance business.
  • Final dividend held firm at 99 cents per share fully franked.
  • CET1 ratio of 9.8%, well above the target range of 8.75%-9.25%.
  • Group net interest margin fell two basis points to 1.88%

The first thing that jumps out at me from the release is the dividend. There has been a lot of speculation in the last few weeks that NAB would be forced to cut its dividend in order to keep its CET1 ratio at a healthy level.

Pleasingly for income investors this has not been the case and NAB has elected to hold the dividend firm at a fully franked 99 cents per share. This brings its full year dividend to $1.98 per share and equates to a fully franked 7.2% based on the last close price.

Although the CET1 ratio fell 47 basis points from last year, it was pleasing to see an improvement on its half year result.

Cash earnings growth of 4% to $6.48 billion was slightly ahead of market expectations. A research note out of Deutsche Bank this week revealed its analysts were expecting cash profit of approximately $6.4 billion.

There were a couple of negatives though. The charge for bad and doubtful debts rose 7% to $800 million. According to management this increase reflects higher specific charges relating to the impairment of a small collection of large single name exposures in Australian banking.

Another slight disappointment was the two basis point drop in NAB's net interest margin to 1.88%. Higher funding costs were largely to blame, offsetting the majority of its lending-margin gains.

Overall I would have to say that this was a solid result. In my opinion NAB looks to be a much stronger and simpler bank now, which should bode well for it moving forward. Rising bad debts are a concern, but this rise appears to be a one-off.

Should you invest? Income investors could do a lot worse than NAB and its fully franked 7.2% dividend. I personally have a slight preference for Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) ahead of NAB, but there's admittedly not much between them at these prices.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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 Bruce Jackson.

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