On Wednesday, BofA Securities analysts issued a downgrade for National Australia Bank Ltd . (NAB:AU) (OTC: OTC:NABZY) shares, moving the rating from Neutral to Underperform and reducing the price target to AUD33.50 from AUD38.00. The downgrade was prompted by the bank’s first-quarter 2025 trading update, which indicated weaker than anticipated revenues and potential increases in bad debts. Currently trading at $12.73, the bank, with a market capitalization of $70.68 billion, is showing signs of overvaluation according to InvestingPro Fair Value metrics.
The analysts noted that increased competition for lending and deposits is expected to compress the bank’s net interest margin (NIM) to 1.67% in FY26E, down from 2H24’s 1.70%. Despite management’s assurance that cost growth would remain below the FY24 rate of 4.5%, concerns were raised that National Australia Bank’s commitment to customer-centricity, along with competitors’ increased investment spending, could lead to higher costs over the medium term. InvestingPro data shows modest revenue growth of 0.37% over the last twelve months, with a Financial Health score rated as FAIR.
The revised price target of AUD33.50 represents a 12% decrease from the previous target of AUD38.00. This adjustment reflects an approximate 5% cut in earnings per share (EPS) across the forecast period and a reduction in the long-run return on equity (ROE) estimate to 12.5%, down from 13.0%. Expectations for pre-provision profit growth were also tempered to about a 3% compound annual growth rate (CAGR) over three years, with the analysts anticipating negative ’jaws’—where the growth rate of expenses exceeds the growth rate of revenue—in FY25E. Despite these challenges, the bank maintains a strong dividend yield of 3.93% and has consistently paid dividends for 33 consecutive years.
Analysts highlighted that the bank’s valuation appears stretched at 15.9 times the 1-year forward consensus price-to-earnings (P/E) ratio, compared to a 10-year average of 12.9 times, and 1.8 times book value for a forecasted 11% ROE. Furthermore, National Australia Bank’s shares are trading at a 13% P/E discount relative to its peers. This reassessment by BofA Securities reflects a cautious outlook for the bank’s financial performance in the coming years. For deeper insights into NAB’s valuation and financial health metrics, including additional ProTips and comprehensive analysis, visit InvestingPro.
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