Should You Buy National Australia Bank Limited at this Share Price?

What happened to the NAB share price?

National Australia Bank Limited [ASX:NAB] fell marginally today. By 3:35pm, the stock was trading at $34.24 a share, which was a 0.83% fall from the previous close. The Aussie market fell today as well. Investors are cautious about high yield stocks, including the big four banks. Lower bond prices continued to weigh on the market. Even the miners were being sold by the market.

Why did this happen to the NAB share price?

The big four are all about investor expectation. The latest quarterly results exposed some softness in the big four. As a result, investors pulled back. How should investors think about the major banks in Australia at this point?
The big picture tells us the market is still swimming in cheap capital due to the now low interest rates. This helps the equity market and the property market. The property market obviously helps the banks’ loan books and helps their profitability. This is a positive.
In terms of operation, the banks face increased competition and lower interest rate margins. This is a negative. On regulation, potential regulation on the tier capital holding threatens profitability. The now very-loose requirements on asset risk-weights allow the banks to over-leverage. This is a potential area for regulations to strengthen, which if true would dampen the earnings of banks. This is a potential negative.

What now for NAB?

The big picture for the Australian economy is on the housing market, and 60% of banking assets are in mortgages. Greg Medcraft, the chairman of ASIC, expressed his concerns about the Sydney and Melbourne housing markets. He said, ‘History shows that people don’t know when they are in a bubble until it’s over.’ The implication was that he meant ‘we are in a bubble’.
The Australian house price index shows we are still at the top of a multi-year cycle. As the saying goes which is quite fitting for real estate cycle: what goes up must come down. Will property prices continue to rise? Yes, until interest rate expectation turns.
Should investors buy banks? Yes, for now. Banks can still benefit from an environment of cheap capital and loose regulatory requirement. But beware; investors getting into bank share now carry more risks than investors who got in years ago.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor


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