The National Australia Bank Ltd (ASX: NAB) share price has fallen from $34.09 almost a year ago to today's $28.71, not a great year but perhaps it's good value now?
NAB may be one of the big four banks but it's not generating big profit growth any more. It is a very different bank compared to a few years ago. It has sold out of its overseas banking operations and is now a much more domestic-focused bank.
NAB is currently under fire by the Royal Commission, which is also looking into the other big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).
According to evidence heard so far, close to 15% of NAB's home loans don't follow its lending standards in the lending policy and over 1,000 customers could have been affected by dodgy loans.
This is a really significant piece of news because a huge part of NAB's earnings rely on the Australian mortgage market. If things start getting tougher households due to mortgage stress then those dodgy loans could come back to bite NAB. The loans may be two or three years old already, but at most that's usually only a tenth of the loan's length – they will still be big loan balances.
Essentially, there are risks to NAB and I don't think anyone inside NAB or outside would be able to easily analyse how much its earnings would be hurt if mortgage rates rise by 0.5% let alone 1% or more.
One of the best things about NAB is that it works with some of the best and fastest-growing businesses on the ASX. I'm thinking about shares like REA Group Limited (ASX: REA), Xero Limited (ASX: XRO) and Afterpay Touch Group Ltd (ASX: APT). NAB would be much better servicing companies like these than focusing on residential mortgages over the coming few year.
Foolish takeaway
NAB is currently trading at 12x FY18's estimated earnings with a grossed-up dividend yield of 9.85%. I can understand why this seems attractive to some people but there is a lot of risk that comes with NAB shares, which is why I'm avoiding them – plus growth could be non-existent for the next few years.
