Is the National Australia Bank Ltd (ASX: NAB) share price a buy?
The big four ASX bank has seen its share price go up over 25% since the start of the year, despite a cut to the dividend. But institutional investors are probably happier with the lower payout because it means NAB is keeping more capital to strengthen the balance sheet and perhaps re-invest for future growth.
NAB has a lot of work to do to get back to its former heights. But with the new leadership duo of Ross McEwan and Philip Chronican, they may finally have two safe pairs of hands to help the bank run efficiently without any damaging scandals. The royal commission is finished, but it's still somewhat in the minds of the banking industry.
Some elements of the bank would do well to shift the mindset to the fact that that people banking with NAB are clients to work with rather than customers to sell to. That was one of my main takeaways from the royal commission.
It's also important for NAB to continue to question its costs of doing business. These new internet-only banks and tech companies have a strong operational cost advantage by having no bank branches, whereas NAB, Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) still have expensive branch networks to run with expensive rent to pay.
I cannot remember the last time I went into a branch, and I barely ever use ATMs these days. I imagine that's the case with most Aussies the same age or younger than I am. Apple, PayPal and others will continue to encroach on the big banks' ancillary revenue territory.
In the key mortgage space things are looking up with house prices recovering – it will be interesting to see how total system credit growth changes over the next few months. NAB is quite well positioned here, but if RBA interest rates go lower I wouldn't be surprised to see NAB's net interest margin (NIM) go lower – this is a long-term danger for banks if rates stay low for a long time. It's one of the main reasons why I'm not interested in owning any banks in my portfolio.
Foolish takeaway
NAB is trading at 13x FY20's estimated earnings with a grossed-up dividend yield of 8.5%. This doesn't seem like a terrible choice with house prices getting better and the economy looking up a little, but I can think of other ASX shares I'd rather buy for my portfolio.
