Let’s take a look at how we can value NAB shares.
NAB is one of Australia’s four largest banks by market capitalization, profits and customers. NAB is one of Australia’s largest business lending institutions. However, it also has a strong presence in residential lending (mortgages, personal loans, etc.), according to APRA banking statistics. NAB also owns Ubank, an online-only and low-cost bank brand.
NAB Share Price
#1 Culture
For long-term investors looking to invest in great companies and hold them for 5, 10 or 20 years, at Rask we think it’s fair to say that a good workplace and staff culture can lead to better retention of high-quality personnel and, in turn, a company’s long-term financial success.
A way in which Australian investors can be exposed to a company. NATIONAL AUSTRALIA BANK LIMITED or Westpac Banking Corp (ASX: WBC) HR/Jobs website to use eg to search. Sec’s website includes data on company culture, including things like employee reviews. According to the most recent data we pulled on NAB, for example, the company had an overall workplace culture rating of 3/5. below Sector average 3.1.
#2 Loans
ASX bank shares such as NAB require deposits and good profit margins to make their business profitable. Meaning, a bank receives money from term deposit holders and wholesale loan investors and lends that money to homeowners, businesses and investors. What is the difference between a bank? pays What else is it for savers? Makes from A mortgage holder (for example) has a net interest margin or NIM. Remember: When it comes to NIMs, the wider the margin the better.
If you are planning to calculate the profitability of a bank like NAB or ANZ Banking Group (ASX: ANZ), it’s important to know how much a bank lends and what it earns borrowers per dollar. This is why NIM is the most important measure of NAB’s profitability. Among the ASX’s major bank shares, we calculated an average NIM of 1.78% while National Australia Bank Limited’s lending margin was 1.71%, highlighting that it delivered a below-average return on lending compared to its peer group. This could be for a number of reasons, which are worthy of investigation.
The reason analysts study NIM so closely is because National Australia Bank Limited generated 81% of its total income (equivalent to income) from lending last year alone.
#3 Why NAB’s ROE is Important
Return on shareholder equity, also known as ‘ROE’, helps you compare a bank’s profitability to its total shareholder equity, as shown on its balance sheet. high ROE better. National Australia Bank Limited’s latest full-year ROE was 11.4%, meaning it generated $11.40 in annual profit for every $100 of shareholder equity in the bank. This was higher than the sector average of 9.35 percent.
#4 Understanding the National Australia Bank Limited CET1 Ratio
For Australian banks, the CET1 ratio (aka ‘common equity tier one’) is the most important. CET1 represents a bank’s capital buffer that can go towards protecting it from financial disaster – basically, it’s the proportion of total assets that are ‘liquid’ or readily available. According to our numbers, National Australia Bank Limited’s CET1 ratio last year was 12.35%. This was above the sector average.
#5 Determine share price using dividends.
The Dividend Discount Model or DDM is one of the most effective ways to generate forecasts for ASX bank shares. To do DDM we have to take the bank’s last full year profit and then apply the risk rating. Last year the total dividend was $1.69. Let’s assume that the NAB dividend payout grows at a constant rate every year in the future, somewhere between 2% and 4%. We will use multiple risk rates (between 6% and 11%) and then average the prices. The calculation we use is: Share price = Full year dividend / (Rate of risk – Rate of return).
| Growth rate | ||||
| 2.00% | 3.00% | 4.00% | ||
|
Hazard ratio |
6.00% | $42.75 | $57.00 | $85.50 |
| 7.00% | $34.20 | $42.75 | $57.00 | |
| 8.00% | $28.50 | $34.20 | $42.75 | |
| 9.00% | $24.43 | $28.50 | $34.20 | |
| 10.00% | $21.38 | $24.43 | $28.50 | |
| 11.00% | $19.00 | $21.38 | $24.43 | |
According to this quick and simple DDM model, NAB’s estimated average share price is $35.74. However, using an ‘adjusted’ dividend payout (expected future dividend) of $1.71 per share, which is the preferred measure because it uses forecasted profits, the price jumps to $36.16. The value compares to NAB’s current share price of $46.84. Since the company’s dividend is fully transparent, we can make further adjustments and make a valuation based on the ‘gross’ dividend payment (this is the value of the dividend including the franking credit). Using cumulative dividend payments, the ‘fair value’ forecast becomes $51.66.
This means that NAB’s share price may look expensive using the basic DDM model, but fair value if you can take advantage of franking credits. Although NAB shares may appear reasonably priced at the moment based on this statistical method, please do not make a decision to buy or sell NAB shares based on this article. It’s important to consider all of the risks and considerations we’ve presented here, including the benefit of increased profitability and the strong impact of franking credits.
To learn more about analysis and evaluation, consider emailing our free investment report to you (keep reading). This should be one of many steps when making an investment decision. Consider reading at least two or three years of National Australia Bank Limited’s annual reports and then look for good investors and analysts who disagree with your view – a great way to find out if you’re making a strong decision based on rigorous analysis and consideration of alternative opinions. Finally, before going any further with NAB or WBC shares, I recommend getting a copy of our free investment report.
