The National Australia Bank Ltd (ASX: NAB) share price has dropped 7% since 8 February. The S&P/ASX 200 Index (ASX: XJO) has only dropped by 1.6% over that time, so NAB has seriously underperformed.
Last week, the ASX bank share announced its quarterly update for the three months to 31 December 2022.
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Earnings recap
I thought that NAB revealed an impressive set of numbers in its quarterly result.
It said that it generated $2.15 billion of cash earnings, which was 18.7% higher than the first quarter of FY22. Cash earnings before tax and credit impairment charges increased 27%.
NAB revealed that its net interest margin (NIM) improved by 12 basis points (0.12%) to 1.79%. Excluding 'markets & treasury' and the impact of liquids, the NIM rose 15 basis points (0.15%) to 1.82%. Certainly, NAB benefited from rising interest rates, partly offset by home lending competition.
Revenue rose by 15%, reflecting higher margins, stronger markets & treasury income, and volume growth. Expenses only rose by 4%, with higher staff-related costs partly offset by productivity and lower remediation charges.
The NAB CEO Ross McEwan said that "continued strong employment conditions and healthy savings buffers mean most customers look well placed to manage through this period".
McEwan also said that NAB is in "good shape for this environment" and that "capital and provisioning remain strong".
Is the NAB share price great value now?
I think it was a strong result for NAB that it was able to grow cash earnings by almost 20%.
Ultimately, ASX share investors should want to see long-term growth from businesses. NAB is achieving growth under the stewardship of Ross McEwan.
The bank's profits are riding the wave of higher interest rates – being able to pass on higher rates to borrowers more strongly than savers is boosting NAB's profitability.
Of course, there's a major concern that these much-higher interest rates could also mean households run into trouble if they're not able to absorb the higher interest rate costs.
While NAB included a credit impairment charge of $158 million in this quarter to reflect the impact of lower house prices and business lending volume growth, specific charges remain at low levels. We can see why with the ratio of loans that are 90+ days past due. NAB's ratio was 0.62% in the FY23 first quarter (this reported quarter), compared to 0.66% for the FY22 fourth quarter and 0.81% for the FY22 first quarter.
The key question is: what level of bad debts will NAB see over the next year or two? With NAB having a group common equity tier 1 (CET1) ratio of 11.3%, I think its balance sheet is well-positioned with good capital levels to weather whatever happens next.
According to Commsec, it's currently valued at just 12 times FY23's estimated earnings.
For me, at the current NAB share price, it's the pick of the domestic banking sector. I'd be happy to own it in a blue-chip-focused portfolio. I think its loan book could perform relatively well in the coming months and years.
