The investment team from WAM Leaders Ltd (ASX: WLE) has named big-four ASX bank National Australia Bank Ltd (ASX: NAB) as the preferred pick in the banking sector.
Wilson Asset Management acknowledged that two banks were useful contributors to the investment performance of the listed investment company (LIC) WAM Leaders in February 2022.
The fund manager said the February reporting season was "strong overall". More companies beat expectations and earnings outlooks were more positive than expected.
Westpac Banking Corp (ASX: WBC) was one bank that delivered a "sound result" that led to a large increase in the Westpac share price. That rise was 12% over the month.
But it's NAB that remains the top ASX bank share pick for WAM Leaders.
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Why is the NAB share price attractive to WAM?
The fund manager said NAB's result demonstrated "strong" revenue growth and constrained cost growth.
NAB's net interest margin (NIM) deterioration was less than the market was expecting, according to WAM.
The fund manager believes the bank's results demonstrated a turning point for investors to focus on the positives of the Reserve Bank of Australia's interest rate increases, which are expected to start in 2022.
WAM believes the banking sector will continue to perform in the coming months thanks to valuation support and earnings momentum.
What did NAB report?
NAB has a different reporting cycle from most other ASX shares. In February 2022, it reported its first-quarter numbers for the three months to December 2021.
In that quarterly result, NAB revealed $1.8 billion of cash earnings. That represented 9.1% growth year on year. Compared to the quarterly average of the second half of FY21, the cash earnings were up 12%.
However, the cash earnings before tax and credit impairment charges were up 6%.
NAB noted that revenue increased 8% in the quarter, reflecting higher volumes across housing and business lending.
Excluding impacts from markets and treasury, and higher 'liquids', the net interest margin (NIM) fell two basis points due to competitive pressures and housing lending mix, partly offset by lower funding and deposit costs.
However, while revenue grew 8%, expenses only increased by 2% in the quarter.
NAB CEO Ross McEwan commented on the numbers the bank revealed:
These results reflect an ongoing focus on executing our strategy, making the bank simpler for customers and colleagues. This is evident in our improving customer net promoter scores in consumer and business over FY22's first quarter, which are pleasingly no longer negative. There is more work to do but we are moving in the right direction.
NAB share price valuation and expected dividend yield
WAM didn't reveal what profit and dividends it's expecting from NAB in FY22.
However, CommSec numbers for the bank show a forecast for FY22 earnings per share (EPS) of $2.09. That implies the NAB share price is valued at 15x FY22's estimated earnings.
Commsec's forecast includes a potential FY22 grossed-up dividend yield of 6.7%.
