The National Australia Bank Ltd (ASX: NAB) share price is now under $20, is it a buy now because it's too cheap to ignore?
The last time that NAB was under $20 for a sustained period was during the GFC. It's almost being priced as the worst time during the GFC. Investors are not confident on the banks at the moment!
NAB and Australia and New Zealand Banking Group (ASX: ANZ) are the two major banks which are more focused on businesses and Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) which are focused more on the mortgage market.
There are worries that small and medium business cashflow is going to dry up and therefore they may be unable to make the required repayments to banks such as NAB. There is definitely a risk of this happening.
But don't forget three important things:
- Healthy CET1 ratio: APRA has been asking banks to build up their CET1 ratio to 10.5% or above for a long time so that they are 'unquestionably strong' in a situation just like this one which is developing. It doesn't mean that banks won't see a hit to profits, but it should mean NAB can ride through this easier than other international banks.
- Government support: The Australian government is working on a package to support Australian small and medium businesses, as well as the wider community and the healthcare system. It's not going to be providing enormous support, but it will hopefully be enough to make a big enough difference for NAB and the economy.
- This is a one–off: The outbreak was painful in China and now it's turning into sizeable numbers in several countries. But at some point the outbreak will slowdown and things will go back to normal. Hopefully sooner rather than later.
Foolish takeaway
NAB is now trading at 9x FY22's estimated earnings. I think we need to look to FY22 as the first normal year, but who knows what's going to happen in between? The NAB share price is definitely cheap, perhaps too cheap, but it may drop even lower if Australia has a similar outbreak to Italy. I'd wait a little longer to buy, though I've got my eyes on other dividend shares.
