NAB (ASX: NAB): Locking in Gains Amid Market Volatility: Taking Profit After a 120.82% Return

Key Takeaways: We are taking profit on National Australia Bank (ASX: NAB) at $41.48, securing a 120.82% return for our members, while maintaining confidence in the bank’s long-term fundamentals. NAB, a leading “Big Four” bank, continues to excel in business banking, driving a 9% increase in Australian business lending and a 7% rise in customer deposits in FY25, with cash earnings stable at $7,091 million and a full-year dividend of $1.70 per share. While operational performance and dividend stability remain strong, much of this strength is already reflected in the share price, which is near our $41.50 target derived from DCF, comparative P/E and P/B analysis, and a dividend discount model. Given the current market volatility and macroeconomic uncertainty, locking in gains now balances realized upside with cautious near-term risk, while long-term investors can still benefit from NAB’s high-margin growth in business banking and consistent dividend stream. --- We have decided to take profit on NAB at this time, securing a 120.82% return for our members. While the bank’s fundamentals remain strong, the current environment of market volatility and macroeconomic uncertainty makes this a prudent move. NAB continues to deliver growth and a stable dividend stream, but with much of this strength already reflected in the share price, locking in gains now allows investors to realize the substantial upside achieved while maintaining confidence in the bank’s long-term potential. Investment Thesis: Strong Operational Performance and a Solid Dividend Stream Underpin Growth Our investment thesis for NAB is rooted in its robust operational performance and the stability of its dividend. In FY25, NAB delivered a 1% increase in underlying profit, with cash earnings broadly stable at $7,091 million, despite a slight rise in credit impairment charges. Key growth indicators include a 9% increase in Australian business lending balances, a 7% rise in customer deposits, and proprietary home lending penetration improving to 41% from 38% in FY24. The bank also maintained a full-year dividend of $1.70 per share, providing a reliable income stream for investors. These results highlight NAB’s continued momentum in its core business segments and its capacity to sustain shareholder returns even in a period of economic uncertainty. Wrap-up: Securing Returns While Remaining Confident in Long-Term Fundamentals Bringing together NAB’s strong business positioning and its FY25 performance, the bank demonstrates both high-margin growth potential in business banking and a consistent dividend stream, making it fundamentally strong. However, with the stock trading near $41.48 and much of these strengths already priced in, combined with the current volatile market environment, we are choosing to take profit now, locking in a 120.82% return for our members. The target price of $41.50 reflects a sensible near-term ceiling, capturing gains while leaving the opportunity to re-enter in future market cycles. This approach balances the rewards of recent performance with caution amid near-term risks, while long-term investors can still retain exposure for dividends.

Company’s Valuation: DCF, Comparative Analysis, and Ratios Supporting Target Price Our target price of $41.50 is derived from multiple valuation approaches: - Comparative Analysis: Peer-average P/E (13.5x FY26 EPS) and P/B (1.5x) suggest a valuation range of $40.50–$41.00. - Dividend Discount Model (DDM): Using the FY25 dividend of $1.70, a growth rate of 2.5%, and cost of equity 7%, the DDM yields $38.72. - Target Price Justification: A modest premium of 7% above the DDM is warranted due to NAB’s high-margin business banking momentum, capital strength, and share buyback capacity, which provide buffers against risk and improve future EPS. This positions $41.50 as a sensible near-term ceiling. Technical Analysis, Price Levels, and Wrap-Up NAB trades at $41.50, following a mild pullback from recent highs ($43.00). Key levels: - Support (S1): $40.50, providing a strong consolidation base. - Resistance (R1): $43.00, representing recent highs and volume accumulation. Price action suggests short-term consolidation, and our target aligns closely with this technical base.

NAB delivered a solid performance for the 2024 financial year. While there was a slight dip in profit, the bank demonstrated strength in key areas, including lending growth and customer deposits. Profit Overview Year-on-Year (September 2024 vs September 2023): NAB saw a small decline in its statutory net profit, down by 6.1%, reflecting a $454 million decrease. Cash earnings also dropped by 8.1%, but despite this, the bank’s performance in areas like non-housing lending and customer deposits remained strong. Half-Year Comparison (September 2024 vs March 2024): When comparing the second half of the year to the first, NAB showed stability, with a modest 0.8% drop in statutory net profit. Cash earnings stayed nearly flat, with a slight uptick of 0.2%. This reflects solid growth in interest-earning assets, suggesting the bank has been able to navigate challenges well. Income Statement Breakdown Net Interest Income: Net interest income saw a slight dip of 0.3% year-on-year. This was mainly due to some pressure on lending margins and rising deposit costs. However, the bank benefited from higher interest rates, particularly from deposits and capital, and experienced healthy growth in interest-earning assets. Other Operating Income: Other operating income decreased by 9.1%, primarily due to the winding down of NAB’s asset servicing business and the sale of its wealth businesses in New Zealand. Despite this, the decline was partially offset by higher fees from business lending, credit cards, and capital markets. Operating Expenses Operating expenses rose by 4.5%, driven by personnel costs and investments in technology, compliance, and cybersecurity. However, NAB has made great strides in improving productivity, which helped keep the increase manageable through better processes and simplification. Credit Impairment Charge NAB’s credit impairment charge dropped by $74 million, indicating an improvement in overall credit quality. This was a result of lower collective credit impairments, with some individual impairments offsetting the gain. Overall, the bank is well-positioned in terms of credit quality, reflecting careful management. Lending and Deposits Lending Growth: NAB experienced strong lending growth, with an increase of $29.7 billion (or 4.2%). Both housing and non-housing lending showed positive momentum, with business and private banking leading the charge. Non-housing lending grew by 6.4%, thanks to a boost in business lending. Customer Deposits: Customer deposits grew by $25.4 billion (or 4.3%). Both term and on-demand deposits rose, particularly in Personal Banking and Business and Private Banking, indicating strong customer trust and engagement. Capital and Liquidity Management NAB’s capital and liquidity remain in excellent shape, with a CET1 capital ratio well within its target range of 11.0% to 11.5%. The bank also completed a $2.1 billion share buyback program and is preparing for upcoming regulatory changes, ensuring it stays ahead of the curve with strong capital frameworks and liquidity requirements.

NAB has been focusing on delivering solid returns to its shareholders. While their FY24 cash EPS is 7% lower than the strong performance in FY23, there is good news in the form of a rise in cash ROE from 8.3% in FY20 to 11.6% in FY24, though just a bit lower than the 12.9% in FY23. The final dividend for FY24 has been set at 85 cents per share, bringing the total for the year to $1.69 per share, which is a small increase from last year. This payout gives a cash earnings payout ratio of 73.7%, staying right on target with their dividend goals.