This isn't a good day for ASX banking shares, but it's the National Australia Bank Ltd (ASX: NAB) share price that's worse for wear on Wednesday.
Shares in the bank tumbled 3.1% to $29.31 while the S&P/ASX 200 Index (ASX: XJO) lost 1.4%.
Other ASX big bank shares were also dragged lower by the sell-off, but they weren't as badly hit. The Commonwealth Bank of Australia (ASX: CBA) share price lost 2.1%, Westpac Banking Corp (ASX: WBC) share price fell by 2.07% and Australia and New Zealand Banking Group Ltd (ASX: ANZ) share price declined 1.37%.
Why is the NAB share price lagging?
The underperformance of the NAB share price is likely due to a broker downgrade. Macquarie Group Ltd (ASX: MQG) cut its recommendation on NAB to neutral from outperform.
The broker noted that the divergence between ASX banks' short- and medium-term outlooks is reaching new highs.
The upside is the next six months stem from the benefits of rising interest rates and lagging term-deposit rates.
Rising rates and bank margins
The Reserve Bank of Australia (RBA) jacked up the cash rate by another 50 basis points yesterday to 2.35%.
Every time it does that, it gives the banks an excuse to lift their mortgage rates. But when it comes to lifting term deposit rates, ASX banks tend to be slower to pass on the extra and often do not hand over the full rate increase. This gives their profit margins a boost.
Hard to be optimistic about ASX bank shares
Macquarie explains:
This dynamic creates a challenging backdrop to formulate the investment thesis. On the one hand, we see further upside risk to bank earnings in 1H23, leaving the sector in a relatively good spot given the uncertain outlook for the broader market.
On the other hand, our earnings forecasts remain well below consensus in FY24 and beyond.
The broker believes consensus is overestimating the profit margins for ASX bank shares, including the NAB share price, over the medium term.
It finds it difficult to be bullish on the sector given potential credit-quality concerns. Then there is also their demanding pre-provision valuations and elevated multiples relative to global peers.
When it comes to the NAB share price, Macquarie reckons it is fully valued. In other words, any good news is already priced in.
NAB share price snapshot
Given that the NAB share price has rallied ahead of the other big ASX bank shares, Macquarie's view is understandable.
Shares in NAB are up 1.6% over the past year. This compares to the 20% plunge in the ANZ and Westpac share prices over the period.
Not even the mighty CBA share price can match NAB as it shed 8.6% in the last 12 months.
Macquarie's 12-month price target on the NAB share price is $30.25 a share.
