Why one top broker remains bullish on NAB’s prospects

NAB share price: a volatile affair

Analysts continue to hold a bullish view on the National Bank of Australia’s (ASX: NAB) prospects in 2020 – with the bank counting itself as the only member of the big four with a BUY rating on average, according to Bloomberg Data.

NAB currently trades at $25.36 per share.

Taking a longer-term view, the NAB share price has struggled: and though at one point in the last year the bank traded close to the $30 per share mark – it gave up most of those gains during the back-half of 2019 – with the stock diving ~15% from its September peak to today.

Disregarding that volatile price action, Citibank today reiterated their BUY rating and 12-month price target of $30.50 on the National Bank of Australia (ASX: NAB). Mind you, this bullish view was punctuated by the slightest of revisions: with Citibank lowering their cash earnings estimates by ~1-2%, due to a revised outlook concerning the bank’s bad debt position.

When including dividends however, and at Citibank’s current price target: investors could be looking at total returns of ~28% over the next 12-months.

Bullish but some caution required

Looking at the frontline concern of Citi’s latest report, we see that the investment bank anticipates that NAB’s bad debt position will edge up in the next few financial years. Looking at expected bad debt charges, Citi is anticipating NAB to record bad debts of $984m in FY20e, $1,058m in FY21e and $1,162m in FY22e.

For reference, NAB recorded bad debts of $919m in FY19.

Looking at the why behind the investment bank’s BUY rating, we see that Citi believes:

'The company is in the midst of realising the payback from material restructuring as part of its organisational transportation, and benefits from being a commercially oriented bank in the current operating environment.'

Yet as with the above comments on bad debt, all of this is not without risk. Indeed, Australia’s banking sector has been heavily scrutinised by analysts, investors and regulatory bodies over the last year. Accordingly, Citi listed the broad risks to NAB – and banking stocks more generally, as:

‘Net interest margin pressure, interest rate risk, market risk, operational risk, funding risk and re-regulation.’

Looking at risks specific to NAB, Citi noted that:

‘The bank is currently undertaking a significant organisational restructure which carries significant execution risk.’

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