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Highlights
- NAB shares up 26% year-to-date in 2024
- FY24 results show a decline in profits, but outlook for 2025 remains uncertain
- UBS forecasts a potential 10% drop in NAB shares over the next year
National Australia Bank Ltd (ASX:NAB) has been experiencing a remarkable performance in 2024, with its share price rising by 26% year-to-date. However, as we look ahead to 2025, the question arises: Can NAB continue this positive trajectory or face a challenging year?
The market has shown increased confidence in NAB’s future prospects compared to the beginning of 2024. Yet, the bank's recent financial results for FY24 revealed some areas of concern. Statutory net profit after tax (NPAT) fell by 6.1% to $6.96 billion, while cash earnings dropped by 8.1% to $7.1 billion. Despite this decline, the bank increased its full-year dividend by 1.2% to $1.69 per share.
One key factor contributing to the bank's weakened performance in FY24 was a drop in the net interest margin (NIM). NIM reflects the profit a bank makes from lending, and the decline was attributed to factors such as heightened competition in the home lending market, higher costs for term deposits, and changes in the bank's deposit mix.
Moreover, NAB’s costs grew by 4.5%, mainly due to inflationary pressures on wages, restructuring, and investments in technology and compliance. These factors have added to the challenges NAB faced in 2024, but the outlook for 2025 remains a topic of debate among analysts.
Expert Insights on NAB’s Future
A report by Creditorwatch indicates that high asset prices, particularly in the housing market, could provide some buffer for banks like NAB. Elevated house prices mean that in the event of mortgage defaults, the bank can often recover more than anticipated by selling the property. Many households have significantly reduced their debt in recent years, thanks in part to sharp increases in property and share prices. This has reduced the risk of substantial losses for financial institutions like NAB, though some non-bank lenders have faced more pressure.
On the other hand, UBS remains cautious about NAB's future performance. The investment firm has issued a “sell” rating for the bank's shares, citing concerns over weakening loan growth, increased credit losses, rising competition in business banking, and higher costs. UBS has set a price target of $35 for NAB shares, suggesting a potential drop of approximately 10% in the coming year. Additionally, the current valuation of NAB shares is considered relatively high, trading at a price-earnings (P/E) ratio of 16.5x, compared to the 15-year historical average of 11.6x.
Financial Forecasts and Outlook for 2025
UBS's financial forecasts for NAB in FY25 are slightly optimistic, with projected revenue of $20.85 billion, pre-tax profit of $10.2 billion, and net profit of $7.2 billion. While this represents a modest increase from FY24, it is not enough to convince UBS that NAB is a compelling investment at its current price.
The outlook for 2025 hinges on NAB's ability to grow profits, improve its cost structure, and navigate the competitive and economic challenges in the financial sector. Shareholder returns will depend on the bank's ability to deliver sustained growth and maintain a strong financial position.
Before making any investment decision, it's crucial to consider the risks and uncertainties in the market. While 2024 has been a strong year for NAB, its future performance in 2025 is far from guaranteed. Investors should weigh the potential for growth against the challenges the bank faces, especially in the context of high valuation and market competition.
Ultimately, while NAB remains a major player in the Australian banking sector, investors must carefully assess their risk tolerance and expectations for the year ahead before investing.
