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Should you buy National Australia Bank Ltd (ASX:NAB) shares?

Credit: NAB

On Monday National Australia Bank Ltd (ASX: NAB) surprised the market by opting not to follow Commonwealth Bank of Australia (ASX: CBA) and the rest of the big four with an out of cycle rate hike.

Instead, the banking giant decided to hold its standard variable rate for home loans at 5.24%. It stated that it made the decision in order to rebuild the trust of customers.

While home owners may be celebrating the decision, National Australia Bank shareholders shouldn’t be according to one leading broker.

A note out of Morgan Stanley reveals that it has retained its underweight rating and $26.40 price target on the bank’s shares following its decision to keep its rates on hold.

The broker believes that the decision will weigh on the bank’s profitability and ultimately its share price performance over the next 12 months.

In addition to this, Morgan Stanley doesn’t believe that keeping rates on hold will result in a meaningful pick up in new loans. Though it does expect it to reduce the risk of current customers switching to competitors.

The broker continues to expect a dividend cut by National Australia Bank this year and has forecast a dividend of 174 cents per share. This compares to the dividend of 198 cents per share it has paid during each of the last three years.

What now?

I agree with Morgan Stanley and think a dividend cut is inevitable now if National Australia Bank is going to achieve the target 10.5% CET1 ratio by January 2020. I fear this could put a spot of pressure on its shares and drag them lower.

In light of this, I would sooner buy the shares of rivals Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ). I think their dividends are secure and could even increase slightly over the next 18 months.

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Motley Fool contributor James Mickleboro owns shares of 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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