NABZY - National Australia Bank: Valuations Are Fair

Summary

• The 2023 prospects for the Australian banking sector and National Australia Bank are mixed.
• National Australia Bank's shares are neither cheap nor expensive, based on peer and historical comparisons.
• I make no changes to my existing Hold rating for NABZY; National Australia Bank's valuations are fair.

Elevator Pitch

I continue to have a Hold rating for National Australia Bank's (NABZY) [NAB:AU] shares.

My focus was on the assessment of National Australia Bank's full-year fiscal 2022 earnings in my prior November 15, 2022, update for the stock. I discuss the Australian banking market's prospects in 2023, NABZY's most recent Q1 FY 2023 (YE September 30) business update, and its valuations in the current write-up. My analysis leads me to the conclusion that National Australia Bank's shares warrant a Hold rating based on a review of its outlook and valuations.

Outlook For The Australian Banking Industry

The Australian banking industry's outlook for this year is mixed.

On one hand, Australian banks in general, including National Australia Bank, should witness stronger net interest income growth and more significant net interest margin expansion in 2023. The Reserve Bank of Australia raised the cash rate from 0.10% at the beginning of 2022 to 3.35% at the end of last year.

According to the sell-side analysts' consensus financial projections taken from S&P Capital IQ , National Australia Bank's top line growth is estimated to accelerate from +8.9% in fiscal 2022 to 17.2% for fiscal 2023. The Net Interest Margin or NIM for NABZY is also forecasted to increase by +17 basis points from 1.65% to 1.82% in the same time frame.

On the other hand, weak macroeconomic conditions are expected to be a major headwind for Australian banks.

An earlier December 20, 2022 research report published by credit ratings agency S&P Global specifically highlighted that an "economic downturn, inflationary pressures and house price declines" could possibly hurt the financial performance of Australian banks in the current year. Separately, Commonwealth Bank of Australia ( OTCPK:CBAUF ) ( OTCPK:CMWAY ), one of NABZY's peers, noted in its recently announced (February 15, 2023) interim results announcement that its loan loss rate increased substantially from -2 basis points for 1H FY 2022 and -7 basis points for 2H FY 2022 to +11 basis points in 1H FY 2023.

In the case of National Australia Bank, the sell-side analysts estimate that NABZY's normalized net profit margin will contract by 0.9% from 38.8% in FY 2022 to 37.9% for FY 2023. National Australia Bank is likely going to increase loan loss provisions for the current fiscal year, and this will naturally become a drag on NABZY's bottom line in 2023.

Q1 FY 2023 Update

National Australia Bank released the company's Q1 FY 2023 business update last week on February 16, 2023.

On the bright side of things, National Australia Bank's NIM expanded by +0.12 percentage points to 1.79% in the first quarter of fiscal 2023, which the company attributed to the "rising interest rate environment" as per the company's business update announcement. This is consistent with the sell-side's consensus NIM growth expectations for full-year fiscal 2023 as noted in the prior section of the article.

On the flip side, credit impairment charges for NABZY rose from A$11 million in Q3 FY 2022 and A$114 million in Q4 FY 2022 to A$158 million for Q1 FY 2023. National Australia Bank mentioned in its first quarter business update announcement that "lower house prices" were one of the key factors contributing to higher credit impairment charges for the most recent quarter. Notably, "house price declines" were also cited by S&P Global as one of the issues that will affect the Australian banking industry negatively this year.

Valuations

The shares of National Australia Bank are fairly valued in my opinion.

Key Valuation Metrics For National Australia Bank And Its Peers

Source: S&P Capital IQ

National Australia Bank's consensus forward ROEs are the second highest in the peer group, and it is also the second most expensive name among its peers in terms of P/E, P/TBV (price-to-tangible book value), and dividend yield metrics. In other words, the current valuations of National Australia Bank are aligned with its expected ROEs based on this peer valuation comparison exercise.

Separately, National Australia Bank's current valuation multiples and dividend yield are close to their respective long-term historical averages. This serves another indication of the stock's reasonably fair valuations. Based on valuation data sourced from S&P Capital IQ , the 15-year mean forward P/E and trailing P/B multiples for National Australia Bank were 11.9 times and 1.9 times, respectively. The stock's 15-year average dividend yield was 6.4%.

Concluding Thoughts

National Australia Bank's stock is deserving of a Hold rating. The outlook for both the industry and NABZY is mixed, and National Australia Bank's valuations are fair.

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