Can investors bank on the NAB share price in July?

After a tough June, we consider if things can get better for the big four ASX bank.

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Key points

  • NAB shares have dropped in June, but one broker thinks the bank can recover
  • Brokers are expecting interest rates to keep rising, but this could lead to higher loan losses
  • House price declines are reportedly starting to accelerate

The National Australia Bank Ltd (ASX: NAB) share price has suffered in June. At the time of writing, the big four ASX bank has dropped 11% in the month. But, it has actually risen by more than 6% since 20 June – so does this mean the clouds are lifting?

As one of the biggest banks in Australia – along with Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ)) and Commonwealth Bank of Australia (ASX: CBA) – changes in interest rates can have a big effect on NAB’s profitability.

The Reserve Bank of Australia (RBA) recently decided to increase the interest rate by 50 basis points, or 0.5%.

With banks passing on the interest rate rises in full, does this mean the NAB share price is more attractive?

Broker views on NAB

The broker Ord Minnett thinks NAB shares are worth buying at the moment, with a price target of $30.50. That’s a potential rise of around 10% on the current price of $27.68. But it would only see the NAB share price return back to where it was in the first week of June.

For Ord Minnett, NAB is the best bank to choose in the sector, partly because it has been achieving the best underlying performance compared to the other big four ASX banks and the broker thinks NAB can keep this up.

Ord Minnett thinks NAB can continue to grow its earnings and dividend. On Ord Minnett’s numbers, the NAB share price is valued at 11x FY23’s estimated earnings. The projected grossed-up dividend yield is 8.5%.

However, other brokers are less optimistic about what’s going to happen next for the NAB share price and the wider banking sector.

For example, Morgan Stanley notes that while higher rates could help the banks’ net interest margin (NIM), it could hurt growth, increase the risk of recession and possibly lead to higher arrears and losses for loans.

But, even the higher interest rates won’t totally add to the NAB margin. Competition continues in the sector, while NAB will have to pay more for its funding for the loans, such as customer deposits with a higher interest rate for the savings accounts.

Morgan Stanley has lower estimates than Ord Minnett for NAB. The broker puts the NAB share price at 12x FY23’s estimated earnings with a projected grossed-up dividend yield of 7.9%.

The market has priced in a high chance that the RBA will increase interest rates by 50 basis points again next week for the July meeting. Investors and borrowers will have to see what NAB does with its loan rates and what this may mean for the NAB NIM.

House prices are falling

According to reporting by The Guardian, the CBA chief economist Gareth Aird believes the RBA will increase the interest rate by 50 basis points.

Aird also expects CoreLogic data (which is released on Friday) will show that “national home prices fell by about 0.9% in June. Sydney, our biggest market, is forecast to be down 1.5% over the month”.

NAB share price snapshot

Since the start of 2022, NAB shares have fallen 6%. However, they are up by more than 5% over the past 12 months.

At the time of writing, the NAB share price is down 1.41% on the day to $27.68.

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 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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