National Australia Bank (ASX:NAB) share price dragged lower by downgrade

The National Australia Bank Ltd. (ASX: NAB) share price is underperforming other ASX big bank shares after it got hit…

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The National Australia Bank Ltd. (ASX: NAB) share price is underperforming other ASX big bank shares after it got hit by a broker downgrade.

The NAB share price tumbled 0.8% to $28.21 during lunch time trade when the S&P/ASX 200 Index (Index:^AXJO) gained 0.2%.

NAB is the worst performer among the big four ASX banks. The Australia and New Zealand Banking GrpLtd (ASX: ANZ) share price advanced 0.3% to $27.65.

The Commonwealth Bank of Australia (ASX: CBA) share price and Westpac Banking Corp (ASX: WBC) share price was largely flat.

NAB share price hit by broker downgrade

What is probably weighing on the NAB share price is Credit Suisse decision to cut its recommendation on the bank to “neutral” from “outperform”.

“NAB has rallied 5% over reporting season and is up 64% on a year rolling basis. The most of its peers,” said the broker.

“It is now trading at 14.9x and has been consistently trading at parity with the sector a position not held for over a decade.”

Good news already in the NAB share price

There is good reason why the NAB share price is back in favour with investors. Operationally, it seems to have regained its mojo.

Nonetheless, the bank shares are trading close to Credit Suisse’s 12-month price target of $28.50 a share. That means it’s no longer a value buy.

ASX bank shares running ahead of fundamentals

In fact, stretched valuations apply to the whole sector, added Credit Suisse. This is why the broker is urging a more cautious approach to ASX bank shares.

“The major banks are now trading on 15.2x 1-year forward PE versus a 4-year average of 12.8x and a 10-year average of 12.4x,” said Credit Suisse.

“While we think the sector provides stable earnings, incremental upside from here appears less than recent history and even though there is still further reserve releases and capital management to come much appears to be in market forecasts.”

The best ASX bank shares to buy now

But don’t take the NAB share price downgrade as a bad omen for all ASX bank shares.

There is only one bank that the broker reckons is worth buying in this current environment. That bank is the Westpac share price and Credit Suisse describes it as its top pick “warts and all”.

“We acknowledge the challenges facing WBC but see a pathway to recovery that the market has yet to embrace,” explained the broker.

“Near term expense and margin pressures are likely to be offset by capital management before a clearer trajectory to emerge next year. WBC is trading on a 12% discount to the sector.”

Credit Suisse’s 12-month price target on Westpac is $28 a share.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking Corporation. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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