Are NAB shares cheap or expensive? Brokers can't agree

National Australia Bank Ltd (ASX: NAB) released its full-year results earlier this week, and it's fair to say they didn't exactly shoot the lights out.

On some key metrics, the bank underperformed compared with the previous year, and it only managed to keep its final dividend steady at 85 cents per share rather than increase it.

Key financial health measure weakened

The metric I like to look at with any company is underlying profit, as it strips out any one-off effects, good or bad.

NAB's underlying profit for the year fell 5.4% to $10.37 billion, while its cash earnings fell 13.4% to $6.14 billion.

Also concerning was the increase in the bank's credit impairment charge from $833 million to $1.54 billion over the year.

The bank said this increase was in part due to forward projections, "reflecting a more challenging economic outlook''.

NAB's business lending division had a good year, increasing lending by 9.8%, with the bank saying it had increased market share.

Overall, the business and private banking (B&PB) division boosted cash earnings by 10.7% to $3.69 billion, which was a strong result.

Personal banking grew cash earnings by 8.7%, while corporate and institutional fell by 6.1%, and New Zealand banking was off by 7%.

Brokers split on the value of NAB shares

Interestingly, the broking teams at UBS and Morgans both reduced their price targets on NAB shares following the result, but UBS rates the bank a buy, while Morgans advises its clients to trim their holdings.

UBS said in its research note published on 6 November that the cash earnings result was a 4% miss on expectations, with the credit impairment charge playing a large role.

The broker added:

The underlying business seems stable notably in B&PB, deposit gathering and increased proprietary mortgage lending. Margins were also steady, expanding in B&PB, corporate and institutional, and flat for retail, indicating discipline credit growth.

UBS likes NAB for its "leading business banking franchise" and a better relative earnings mix than its peers following the Federal Budget tax changes.

UBS added:

Upside relies on the franchise converting resilient margins, business lending growth and a leaner cost base into stronger earnings per share as restructuring benefits emerge in FY28E. Higher provisions and dividend reinvestment plan dilution temper the near-term outcome.

UBS reduced its price target on NAB shares from $48.50 to $45; however, it remains well above the current level of $39.98.

Questions around growth cloud the outlook

Morgans, on the other hand, has a price target of just $34.19 on the bank and while it agrees NAB has a good business banking franchise, it says the bank's growth outlook just doesn't justify the current share price.

Morgans, in its research note published on 5 November, also forecasts that NAB will keep its dividend steady at the half-year mark rather than increase it.

Foolish takeaway

The increase in credit impairment charges indicates headwinds for the bank, and with higher interest rates potentially putting a brake on mortgage lending and with a tough economy looming, I'm not expecting big returns from NAB in the medium term.    

On balance I'd split the difference and call it a hold.

The post Are NAB shares cheap or expensive? Brokers can't agree appeared first on The Motley Fool Australia.

Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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