3 reasons why I think it's time to snap up NAB shares

I think that NAB is making all the right moves.

| More on:
A woman dressed in red and standing in front of a red background peers thoughtfully at a piggy bank in her hand.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • NAB's management team has steered the bank back toward profit growth and stability, in my opinion
  • Rising interest rates can help the bank earn more profit from its loans
  • It's predicted to pay large, growing dividends over the next couple of years

The National Australia Bank Ltd (ASX: NAB) share price has been trending lower in recent weeks. It's down by 6% since 2 November 2022. For a large S&P/ASX 200 Index (ASX: XJO) bank share in a rising interest rate environment, I think that's a noticeable drop.

Over that same time period, the ASX 200 has gone up by 2.4%. So, that's a sizeable bit of underperformance.

However, I think that the period of underperformance could make it an attractive time to consider the NAB share price for these three reasons.

Savvy management

The management team at NAB are a quality group, in my opinion. They have done an excellent job of turning the company around.

Decisions made by the business have led to the bank reporting solid numbers. In the FY22 result it revealed 8.3% growth of cash earnings to $7.1 billion. Underlying profit growth was 11.5%.

NAB noted that this result was achieved through its strategy, including targeted volume growth and a disciplined approach to managing costs while investing for growth.

The CEO said that an ongoing focus on strong balance sheet settings has been "key to delivering sustainable growth and keeping the bank safe".

I like how the bank is positioned going into this period where households could see elevated mortgage stress. At the end of FY22, it had a group common equity tier 1 (CET1) ratio of 11.5%.

NAB CEO Ross McEwan said:

Maintaining these settings is important during the current economic uncertainty, with higher interest rates and higher inflation likely to challenge some customers. However, strong employment conditions along with substantial household and business savings give us confidence in the resilience of our customers and the broad economy.

We will continue to remain focused on the disciplined execution of our strategy to support sustainable growth in earnings and shareholder returns over time.

Interest rates are rising

Central banks have been hiking interest rates to try to take the steam out of the economy.

The Reserve Bank of Australia (RBA) interest rate has jumped from 0.10% to 2.85%. Though, it could go even higher from here.

ASX bank shares like NAB, Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group Ltd (ASX: ANZ) and Westpac Banking Corp (ASX: WBC) have been passing on the interest rate hikes to mortgages faster than for savers.

Due to this, I think that NAB's lending profit can increase. The net interest margin (NIM) – the lending profitability that compares the lending rate against the cost of the funding (such as term deposit) – is increasing for NAB.

NAB said that in the fourth quarter of FY22 it achieved a NIM of 1.72%, which was up 10 basis points (or 0.10%) compared to the third quarter. This is good for ongoing profitability.

However, I think we should remain aware of the potential for higher arrears and bad debts with borrowers.

Dividend outlook for investors holding NAB shares

NAB has been growing its dividend for shareholders, which means increasing cash returns from the business.

In FY22 the ASX bank share grew its total annual dividend by around 19% to $1.51 per share. That currently represents a grossed-up dividend yield of 7%.

In FY23, CommSec has estimated an annual dividend of $1.72 per share for NAB, which equates to a grossed-up dividend yield of 8%.

The grossed-up dividend yield in FY24 could be around 8.3% according to CommSec.

NAB's dividends alone could provide a solid return for shareholders over the next couple of years.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Westpac Banking Corporation. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Bank Shares

Shocked office worker staring at computer screen with colleagues working in the background.
Bank Shares

The ASX bank share beating CBA in 2025

Many investors might not realise this smaller bank stock is leading the pack this year. 

Read more »

man thinking about whether to invest in bitcoin
Bank Shares

Here's what needs to happen for the CBA share price to try and reach $200

What could drive the CBA share price higher?

Read more »

A young woman sits at her desk in deep contemplation with her hand to her chin while seriously considering information she is reading on her laptop.
Bank Shares

Why now could be an opportune time to sell CBA shares

A leading expert offers his verdict on the outlook for CBA shares.

Read more »

A man holding a cup of coffee puts his thumb up and smiles while at laptop.
Bank Shares

The Westpac share price is a buy – UBS

The broker is optimistic on Westpac shares.

Read more »

Bank building with the word bank on it.
Bank Shares

The biggest buyers and sellers of ASX 200 bank stocks revealed

Macquarie breaks down who’s been buying and who’s been selling the ASX 200 bank stocks.

Read more »

A young woman sits with her hand to her chin staring off to the side thinking about her investments.
Resources Shares

Should I switch my ASX 200 banking stocks for ASX 200 miners before earnings season?

The ASX 200 Index is dominated by Australia's bank and materials/mining sectors, which together account for around half of the…

Read more »

A man sits in contemplation on his sofa looking at his phone as though he has just heard some serious or interesting news.
Bank Shares

Here's when Westpac says the RBA will now cut interest rates

The RBA surprised everyone by keeping rates on hold last week. So, when will the next cut happen?

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Bank Shares

This is the ASX bank stock with the largest dividend yield right now

Looking to ASX bank stocks for dividend income right now?

Read more »