The NAB share price is down 10% this week: Macquarie says it’s a buy

The broker has weighed in with its thoughts on the big four bank.

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Key points

  • The broker Macquarie thinks NAB shares are a buy after dropping 10% this week
  • Rising interest rates could be a benefit for the bank
  • NAB is expected to pay a grossed-up dividend yield of more than 7% in the next two financial years

The National Australia Bank Ltd (ASX: NAB) share price has fallen by close to 10% this week.

Indeed, all of the other big four banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), and Australia and New Zealand Banking Group Ltd (ASX: ANZ) have also seen their share prices decline this week.

After that decline, the broker Macquarie believes that NAB is an interesting opportunity.

What happened this week?

Earlier this week, the Reserve Bank of Australia (RBA) decided to increase the interest rate (the cash rate target) by 50 basis points to 85 basis points. The RBA rate is now 0.85%.

There has been a lot of commentary that a rising interest rate could help the net interest margin (NIM) of the banks. This is the margin that the banks make on their lending, compared to the cost (such as savings accounts). The broker Macquarie also sees that potential improvement in margins for NAB.

However, some experts, such as Morgan Stanley, have pointed out that banks are also increasing the interest rate for savers and term deposits, which could be a negative for the NIM.

Macquarie says NAB share price is a buy

The broker has an ‘outperform’ rating on NAB, with a price target of $34. That implies a potential rise of around 20% over the next year on the current NAB share price of $28.22.

It thinks that people that don’t move their money to try to get the best rates — the people that aren’t proactive — will help improve margins for NAB.

Macquarie is expecting a basis point boost in the mid-to-high single digits for NAB over the next year.

Valuation

Using the numbers that Macquarie has projected, the NAB share price is valued at 13.5x FY22’s estimated earnings. Looking at the projected earnings for FY23, NAB shares are valued at 12x FY23’s estimated earnings.

Morgan Stanley’s earnings estimates for NAB over the next two financial years are very similar to Macquarie’s.

But there is more to the bank business than just its valuation.

Dividends can also form an important part of the total returns from the bank.

Macquarie thinks the projected grossed-up dividend yield for NAB in FY22 is going to be 7.4%. The broker is expecting another dividend increase in FY23, leading to a possible grossed-up dividend yield of 7.6%.

NAB share price snapshot

While the NAB share price may be down this week, it’s actually up by around 6% over the past year. However, it is down by around 2% this year to date and more than 10% over the past month.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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 Macquarie Group Limited and Westpac Banking Corporation. 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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