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Morgan Stanley’s warning that National Australia Bank Ltd. is set to fall in the next month or two

The share price of the big four banks may be under pressure but its National Australia Bank Ltd. (ASX: NAB) that is most at risk of underperforming in the short-term if Morgan Stanley’s prediction comes to pass.

The broker is warning that there is a 60% to 70% chance that the stock will lag the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) within the next 60 days as the bank prepares to hand down its first-half profit results.

NAB is at risk of missing expectations on its interim revenue when it announces its results on May 3, 2018 as Morgan Stanley declares the end of the “Australian bank supercycle” that have lifted the fortunes of not only NAB but its peers Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).

However, NAB is more vulnerable to the increase in short-term funding costs compared to its peers, added the broker.

Bond yields have been rising due to not only the tightening bias by the major central banks but also the rising deficit in the US to pay for President’s Trump generous corporate tax cuts.

Further, Morgan Stanley feels that the market is too optimistic about the recovery in NAB’s business banking business.

It doesn’t help that NAB is the only big bank stock that is trading above its long-term price-earnings (P/E) multiple averages either, while the other big banks are hovering below their historical P/Es.

It shouldn’t be a surprise then that the broker has an “underperform” recommendation on the stock with a price target of $28.20 per share. NAB’s share price was under pressure in the morning but has clawed back to trade 2 cents higher at $28.87 during lunchtime trade.

But I don’t think it’s only NAB that is facing a challenging outlook. The rest of the sector looks like it is facing a consensus downgrades later this year as the risks exposed by the Banking Royal Commission has not been reflected in broker valuations as yet.

What’s worrying about Morgan Stanley’s prediction is that a revenue or profit miss by NAB next month could prove to the catalyst that triggers a downgrade cycle for the banking sector.

Investors will need to be alert in May as Westpac and ANZ Bank are also scheduled to report their results that month.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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