The National Australia Bank (ASX:NAB) share price target upgraded by a top broker

The NAB share price failed to shake sector pessimism on Monday.

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Key points

  • The NAB share price gives up early gains even after Morgan Stanley increased its price target
  • ASX banks are set to benefit more from rising interest rates, according to the broker
  • ASX banks are also outperforming their global peers since Russia’s invasion of Ukraine

The National Australia Bank Ltd (ASX: NAB) share price dropped into the red, along with the sector, despite a valuation upgrade by a leading broker.

The NAB share price surrendered its morning gains to trade 0.85% lower at $30.94 in late afternoon trading on Monday.

It isn’t the only bank share that’s slipped. The Commonwealth Bank of Australia (ASX: CBA) share price is 0.26% lower while Westpac Banking Corp (ASX: WBC) shares are 0.42% in the red.

Only the Australia and New Zealand Banking GrpLtd (ASX: ANZ) is treading water at $27.62, up 0.16% at the time of writing.

It’s marginally ahead of the S&P/ASX 200 Index (ASX: XJO)’s small gain of 0.05%.

NAB share price gives up gains

The ASX big banks are retreating as US share futures fell and the oil price jumped. The anticipated weak start on Wall Street and rising cost pressures are weighing on market sentiment.

The NAB share price lost ground even after Morgan Stanley reported ASX banks could enjoy a larger benefit from rising interest rates, according to The Australian.

“With about $800bn of capital and rate insensitive deposits in Australia, we estimate that every 25bp (basis points) increase in the RBA cash rates adds about 3bp to the major banks’ margins,” said the broker.

“All else equal, our new forecasts assume an average margin benefit from rate hikes of +20bp by the end of FY24E, versus +11bp previously.”

ASX bank valuation increase offset by headwinds

But the margin benefit may be partly eroded by a few headwinds. These include higher funding costs, fiercer mortgage competition, and modestly higher loan losses.

The risk of higher loan losses will force the NAB and its peers to increase impairment charges by around 15% in FY24, warned Morgan Stanley.

Nonetheless, earnings per share (EPS) for the ASX big four are tipped to increase by 1% to 3% in FY23 and FY24.

Price target increases for NAB share price and its peers

That in turn sees the broker’s 12-month price target on the NAB share price rise by $0.50 to $31.50 a share.

The other big banks also get an uplift. The CBA price target increases to $92 from $91, the ANZ Bank share price lifts to $30.30 from $30, and Westpac gets a $0.40 boost to $22.40 a share.

But investors shouldn’t be too upset with the underperformance of ASX bank shares today. Citigroup noted that our banks have outpaced their global peers over the last five weeks.

ASX banks beating other global banks

“The Russia/Ukraine conflict has ushered in sharply rising commodities prices and accelerating inflation,” said Citi.

“Spooked investors have shifted to a risk-off position, selling down the global banks sharply. The Australian banks have surprisingly bucked this trend.

“We believe this is due to Australia’s commodities-dependent economy, an accelerating inflation & rates story as well as a strong capital adequacy & NPL combination.”

However, given Citi’s view that revenue growth will be hard to find in this environment, the only bank the broker thinks is worth buying is Westpac.

Motley Fool contributor Brendon Lau owns 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 recommended Westpac Banking Corporation. 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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