How to Value ASX Bank Stocks Using the PE Ratio

National Australia Bank trades on a trailing price-to-earnings ratio of 18.97x as of May 2026. That figure sits below Commonwealth Bank’s 26.64x and close to the other two majors. On the surface, it looks like a discount. But knowing a stock trades below a peer average and knowing whether it is genuinely cheap are two different things. The first is a data point; the second requires a method.

The PE ratio remains one of the most widely used starting points for valuing ASX bank stocks, and for good reason. The four major banks collectively represent more than one-third of the ASX 200 by market capitalisation, which means most Australian equity investors hold exposure to at least one of them. Understanding how to read and apply a sector PE multiple is a foundational skill, not an optional one.

This guide walks through the PE valuation methodology step by step, using NAB as a live worked example with May 2026 data. It shows how to derive a sector-adjusted target price, explains the macro conditions that shape which multiple to apply, and identifies where the method falls short and what other metrics to layer alongside it.

What PE ratios actually measure (and why analysts use them for banks)

A price-to-earnings ratio represents how much investors are paying for each dollar of a company’s annual profit. The formula is straightforward:

PE ratio = Share price ÷ Annual earnings per share (EPS)

Two variants exist, and which one appears on a data provider’s screen depends on the earnings figure used:

• Trailing twelve-month (TTM) PE: Uses the most recent four quarters of reported earnings. This reflects what a company has already delivered.
• Forward PE: Uses analyst consensus EPS forecasts for the coming year. This reflects what the market expects the company to deliver.

For banks, the absolute PE number on its own carries limited information. A PE of 18x is not inherently expensive or cheap. It becomes meaningful only when compared against a peer group or sector average, because it reveals whether the market is paying more or less per dollar of profit for one bank relative to another.

That relative comparison is the tool analysts actually reach for. Using NAB’s reported FY24 EPS of $2.26 and a trading price of $37.85, the implied PE is approximately 16.7x. Whether that represents opportunity or fair pricing depends entirely on where peers sit, and the next section lays that out.

PE ratios sit within a broader set of fundamental analysis metrics, including EPS, revenue growth, profit margins, and return on equity, each of which answers a different question about the same company and together provide more context than any single figure read in isolation.

The four major banks side by side: reading NAB’s peer comparison

The following table presents trailing twelve-month PE ratios for the four major ASX banks as of 22 May 2026.

PE ratios are point-in-time figures sourced from Wisesheets.io and GuruFocus as at 22 May 2026. These figures move daily with share prices.

Two distinct groups are visible. CBA sits alone at 26.64x, trading at a material premium to every other major. NAB, ANZ, and Westpac cluster in the high-teens range, broadly comparable to one another.

CBA’s premium is not a mispricing. It reflects a higher return on equity, a dominant retail mortgage franchise with pricing power, and a consistency of earnings delivery that the market has rewarded with a structurally elevated multiple for years. Treating CBA as an anomaly, rather than a quality premium, leads to flawed conclusions about whether the other three are genuinely cheap or simply priced for what they are.

Calculating a sector-adjusted target price for NAB: step by step

With the peer landscape established, the next step is to turn it into a number. The PE valuation method for a bank stock reduces to three inputs and one multiplication.

Three approaches exist for selecting the PE multiple to apply:

• Personal threshold: Setting a maximum PE the investor is willing to pay, based on individual return expectations.
• Peer comparison: Using a specific peer’s PE as a benchmark (for instance, asking what NAB would be worth if the market valued it like Westpac).
• Sector average: Calculating the mean PE across the peer group and applying it to the target stock’s EPS.

The sector-average approach is the most commonly demonstrated in valuation education, and it works as follows:

1. Find the company’s earnings per share. NAB’s reported FY24 EPS was $2.26 per share (referenced in Rask Media education material; investors should verify against NAB’s own ASX filings before relying on this figure for personal analysis).
2. Select a PE multiple. Using an approximate 18x sector average for the four-major peer group. Some analysts exclude CBA when calculating this average, given its structural premium would otherwise skew the benchmark upward. The 18x figure here reflects the cluster multiple for the three non-CBA majors.
3. Multiply to derive the implied value. EPS of $2.26 multiplied by 18x equals an implied value.

NAB’s FY24 EPS of $2.26 multiplied by the 18x sector average PE produces a sector-adjusted implied value of $41.14 per share, compared with NAB’s observed trading price of $37.85.

The gap between $37.85 and $41.14 is approximately 8%, suggesting NAB traded at a discount to its sector-adjusted implied value at the time of analysis. That discount does not automatically mean the stock is undervalued. It means the market is pricing NAB below what the peer-average multiple would justify, and the next question is whether the market has good reasons for doing so.

What the macro environment tells you about the right PE to apply

The PE multiple is not a fixed number. It is a judgement call, and the economic environment directly shapes what multiple the market is willing to assign to bank earnings.

Three macro variables matter most:

• RBA cash rate (currently 4.35%): The Reserve Bank of Australia’s rate, following increases at the February, March, and May 2026 meetings, underpins relatively high net interest margins. However, the trajectory of future rate decisions drives how the market prices the persistence of those margins, and therefore the PE it assigns to bank earnings.
• Unemployment (4.5% in April 2026): A rising unemployment rate compresses the PE multiple the market is willing to pay, because higher joblessness increases expected credit losses and makes future earnings less certain. Australia’s unemployment rate reached 4.5% in April 2026, up from 3.9% a year earlier, according to the ABS Labour Force release published 21 May 2026.
• Residential property prices (rising year-on-year): National values continued to rise through the March quarter 2025 (ABS Residential Property Price Indexes) and April 2025 (CoreLogic Home Value Index), with Sydney and Brisbane leading gains. Rising property prices support collateral values on mortgage books and reduce loss-given-default, which supports earnings quality and justifies relatively higher PE multiples for mortgage-heavy lenders.

Australia’s unemployment rate reached 4.5% in April 2026, up from 3.9% a year earlier, raising credit risk assumptions for major bank earnings.

NAB’s heavier exposure to business lending, relative to CBA’s dominant retail mortgage franchise, means its earnings are more sensitive to business credit conditions than to property collateral trends. An investor applying an 18x multiple during a period of rising unemployment may be overstating earnings persistence; an investor applying 16x may be pricing in the macro headwind more accurately. The multiple is itself an economic bet.

The sensitivity of bank valuations to macro assumptions is not a minor caveat; the same NAB model can produce a fair value range from $19 to $85 per share depending entirely on the RBA rate path, employment trajectory, and property price outlook the analyst chooses to embed.

Where PE ratios fall short: complementary metrics for bank valuation

PE ratios applied to banks carry specific weaknesses that readers should understand before treating any PE-derived figure as definitive.

Provisioning cycles distort reported EPS. When banks increase their expected credit loss provisions, earnings fall for reasons unrelated to the underlying business performance, producing PE readings that misrepresent the company’s earning power. One-off items, including remediation charges, software write-downs, and restructuring costs, create similar distortions. A single year’s PE can be noisy.

Two complementary metrics offer more structural stability.

Price-to-book ratio and return on equity

• What it measures: Price-to-book (P/B) compares a bank’s equity market value to its net assets. It is more stable across economic cycles than PE for regulated, capital-intensive businesses.
• Why it matters for banks: APRA’s capital requirements (CET1 ratio targets) make the regulated capital structure of banks a direct link between book value and franchise value. A bank generating return on equity (ROE) above its cost of equity justifies a P/B above 1.0x; the magnitude of the premium is proportional to the ROE advantage.
• NAB context: CBA’s persistently higher ROE supports its higher P/B, which means direct PE comparisons between NAB and CBA can be misleading without adjusting for this structural difference.

BIS research on bank profitability and price-to-book valuation establishes that a bank’s PBR reflects investor expectations of its capacity to generate returns above the cost of equity, providing the academic grounding for why ROE differentials between CBA and the other three majors translate directly into durable valuation premiums rather than temporary mispricing.

Dividend yield and franking credits

• What it measures: Dividend yield expresses the annual cash return per share as a percentage of the share price. For Australian resident investors, fully franked dividends carry a 30% franking credit that effectively adds value through the tax treatment of returns.
• Why it matters for banks: Australian major banks are among the largest dividend payers on the ASX, and the franking credit system means comparing yields on a pre-tax gross basis (cash dividend plus franking credit grossed up) provides a more accurate picture than cash yield alone.
• NAB data: FY24 total dividends were $1.67 per share (fully franked), comprising an 83-cent interim and an 84-cent final dividend, according to NAB’s ASX Appendix 4E released 9 November 2024. The most recent interim dividend was 85 cents per share, reported on 4 May 2026.

No single valuation metric is sufficient for bank stocks. Layering P/B, ROE, and dividend yield alongside PE analysis produces a less cyclically distorted view of relative value.

A useful starting point, not a final answer

The PE methodology reduces to three steps: find the company’s EPS, select an appropriate multiple, and multiply to derive an implied value. Applied to NAB with FY24 EPS of $2.26 and an 18x sector-average PE, the method produces an implied value of $41.14, compared with a market price of $37.85 at the time of analysis, suggesting the stock traded at an approximate 8% discount to its sector-adjusted implied value.

The same process applies to ANZ, CBA, or Westpac using publicly available EPS figures and the peer PE table above. The arithmetic is replicable; the judgement lies in choosing the right multiple and understanding the macro conditions that shape it.

A PE calculation is one input in a broader toolkit. Alongside price-to-book, return on equity, and dividend yield, it forms part of a disciplined but iterative process. Treat it as a starting point for informed analysis, not a single-number verdict.

For readers ready to build a more structurally stable valuation framework alongside the PE approach, our full explainer on NIM, ROE and CET1 valuation for ASX bank shares uses Westpac’s live H1 2026 data to show how net interest margin, return on equity, and capital ratio analysis can shift fair value estimates from $34 to $49 per share depending on which metrics are incorporated.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions. Past performance does not guarantee future results. Financial projections are subject to market conditions and various risk factors.