Can NAB Outrun The ASX 200? A Simple Look At Valuation

Highlights

• NAB is a major weight in the Australian banking and ASX 200 landscape

• A sector-based PE lens can frame how the market prices NAB’s earnings

• A dividend discount model can help explore income-focused valuations

NAB is a core ASX bank, and simple earnings and dividend models provide two ways to frame its valuation, while underlining how much any estimate depends on assumptions rather than certainty.

National Australia Bank Ltd (ASX:NAB) is one of the largest listed financial institutions in the country and a major component of the main Australian benchmark index. The big banks together account for a substantial portion of that index’s total value, so their moves often drive broader market direction.

Because of this, questions like “Can NAB shares beat the ASX 200 in the coming year?” come up regularly. There is no way to answer that with certainty. Relative performance will depend on how profits, dividends, interest rates, credit conditions and sentiment play out over time.

What can be done is to use a few simple tools to frame how NAB is currently valued. The original note you shared highlights two common approaches:

• An earnings-based view using the price-earnings ratio

• A dividend-based view using a Dividend Discount Model

Both are frameworks, not forecasts.

How can a PE ratio help frame NAB’s valuation?

The idea behind the PE ratio

The price-earnings (PE) ratio compares a company’s share price with its earnings per share from a given period. In simple terms, it shows how many units of price the market is willing to pay for each unit of past profit.

For banks, this ratio is often compared across the sector:

• If a bank trades on a similar PE to its peers, the market is pricing its earnings broadly in line with the group.

• If its PE is much higher, the market may be assuming stronger growth, better quality earnings or lower risk.

• If its PE is much lower, the market may be more cautious about its outlook or balance sheet.

Applying that idea to NAB

In the article you shared, the PE worked out to be slightly above the stated sector average, using NAB’s most recent earnings per share and a then-current share price. That suggests the market was valuing NAB’s earnings at a level just a touch richer than the typical bank in its peer group.

The author then flipped the exercise:

• Take NAB’s earnings per share

• Multiply by the average banking sector PE

This “sector-adjusted” calculation produced an indicative value very close to the share price at the time.

The key takeaway from this lens is not that NAB is cheap or expensive, but that its earnings were being priced broadly in line with the wider banking sector under those assumptions.

How can a Dividend Discount Model be used for NAB?

Why look at dividends for banks?

Bank shares are widely followed for their dividends. A Dividend Discount Model (DDM) treats a share as the present value of all future dividends, discounted back to today at a required rate of return.

A basic DDM needs three ingredients:

• A starting full-year dividend

• An assumed long-term dividend growth rate

• A required return or “risk” rate

The result is a theoretical fair value based on those inputs.

A simplified DDM for NAB

In the example:

• The author took NAB’s last full-year dividend as a starting point

• Assumed a steady rate of dividend growth

• Tested a range of required return rates from lower to higher levels

On a cash-dividend basis, the resulting valuations clustered below the then-current share price. When the starting dividend was adjusted slightly higher, the indicative value moved up a little, but still remained under the market price in that scenario.

The note then repeated the process using a grossed-up dividend figure that includes franking credits. Under those assumptions, the model produced a value above the prevailing share price.

So depending on whether:

• Cash dividends are used, or

• Grossed-up dividends including franking are used

The indicative valuation can sit either below or above the market price.

What does that show?

Primarily, it demonstrates that:

• DDM outputs are very sensitive to the chosen growth and discount rates

• Including or excluding franking credits can significantly change the result

• Any single output is only as sound as the assumptions behind it

In other words, the DDM is a helpful thought tool, not an oracle.

Do these tools say if NAB can “beat” the index?

Neither the PE comparison nor the DDM can predict whether NAB will outperform or underperform the ASX 200. They simply help frame questions like:

• Is the market treating NAB’s earnings differently from other banks?

• How does the cash dividend stream compare with different required return assumptions?

• What might the share price be implying about future growth, risk and payout?

Actual performance relative to the index will depend on future events:

• Changes in interest rates and credit conditions

• Shifts in loan demand and fee income

• Asset quality trends and arrears

• Regulatory developments and capital requirements

• Broader economic indicators such as employment and housing

The models give structure to valuation discussions, but they do not answer the “beat the index” question on their own.

What else matters when researching NAB?

The original article rightly suggests that these two models are just the beginning of a deeper process. A fuller view of NAB might consider:

• Business mix

  • How much emphasis is on traditional lending versus fee-based and other non-interest income?

• Asset quality

  • How are mortgage and business loan arrears trending?

  • What is happening with provisions for potential credit losses?

• Capital and funding

  • How strong is the capital position relative to regulatory expectations?

  • What does the funding mix look like between deposits and wholesale markets?

• Economic context

  • How are housing markets, employment and consumer sentiment evolving?

• Management and culture

  • How is the leadership team viewed?

  • What do internal culture indicators and customer outcomes suggest?

These qualitative factors interact with the quantitative models to build a more rounded picture.