The National Australia Bank Ltd (ASX: NAB) share price will be on watch on Friday after being upgraded by analysts at Goldman Sachs.
According to the note, the broker has upgraded the banking giant's shares from a neutral rating to a buy rating with a $30.76 price target.
This price target implies potential upside of over 25% for its shares over the next 12 months. If you factor in its dividend, which Goldman expects to remain at $1.98 per share, this potential return stretches to over 33%.
Why is Goldman Sachs bullish on NAB shares?
Goldman Sachs named six reasons why it is bullish on NAB at the moment. They are as follows:
The broker believes that the revamp of NAB's portfolio means that its return on tangible equity (ROTE) outperformance is sustainable.
Its analysts also expect that the bank's significant exposure to the small to medium sized lending market is a big positive. This is expected to be a volume tailwind for the bank this year.
Another positive for Goldman is the bank's cost program. It believes this will contribute to pre-provision operating profit (POPP) outperformance.
Goldman Sachs has also pointed to the 22% decline in NAB's mid-cycle loss rate over the last decade as a reason to be positive. The bank's de-risking from its portfolio optimisation has been behind this and is being underestimated by the market according to the broker.
One major reason that the broker is bullish is its belief that NAB will meet the unquestionably strong capital requirements by the end of the year without cutting its dividend. Though, this is dependent on its divestment of the MLC business.
And finally, valuation is another key reason Goldman upgraded its shares to a buy rating. The broker notes that NAB's shares are trading close to five-year low multiples and offer a larger than average dividend yield.
Should you invest?
Although it isn't necessarily my first pick in the industry, I completely agree with Goldman that NAB's shares are in the buy zone right now.
I still have a preference for Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ), but I feel all four big banks are likely to be equally good investments this year.
