The National Australia Bank Ltd (ASX: NAB) share price has seen plenty of volatility this year. But, despite everything, it's up more than 6% for the year. This means it has outperformed the S&P/ASX 200 Index's (ASX: XJO) decline of 3.8% by more than 10% year to date.
Now it seems NAB could have an interesting end to the year. Comments by central banks have suggested interest rates could see smaller increases than we've seen so far this year.
For example, US Federal Reserve boss Jerome Powell recently said:
It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down.
The time for moderating the pace of rate increases may come as soon as the December meeting. It is likely that restoring price stability will require holding policy at a restrictive level for some time. History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.
Time will tell whether this will lead to a strong run for ASX bank share prices going into the end of the year.
What does this mean for NAB shares?
It would have been illogical to think that central banks were going to keep increasing interest rates forever. At some point, the size of the increases was going to reduce.
Banks pay close attention to interest rates, as they are key to banks both getting funding and lending out money.
Higher interest rates are having a positive effect on the net interest margin (NIM) of NAB as it passes on higher interest more quickly to borrowers compared to savers. The NIM is the measure of profit that compares the cost of the lending (for example, interest paid for the bank's savings accounts) to the loan rate for lending.
NAB revealed in its FY22 result that its FY22 fourth quarter NIM was 1.72%, a 10 basis point (0.10%) increase on the third quarter.
So, surely another RBA interest rate increase of 0.25% in December would be a boost for the NAB share price?
Maybe not. Investors are already expecting the RBA will increase the interest rate this month. Plus, NAB noted the estimated benefit of cash rate increases from October 2022 is expected to be lower. The NIM impact of RBA cash rate increases on unhedged deposits is expected to peak in the FY23 first half, according to the bank.
But, it also noted that "housing lending competitive pressures are likely to intensify".
Time to invest?
The NAB share price has fallen by 4% since early November.
Broker UBS is currently neutral on the ASX bank share, with revenue and costs under scrutiny. The price target – which is where the broker thinks the share price will be trading in 12 months – is $33. That implies a mid-single-digit rise over the next year.
Ord Minnett, another broker, is one of the most optimistic about the ASX bank share. It rates it as accumulate with a price target of $33.80, suggesting a possible rise of around 8%.
But, while the broker Morgan Stanley rates NAB as equal-weight (which is like a hold), the price target of $30 implies a possible mid-single-digit drop for NAB shares. Expectations of higher costs led to the broker decreasing its expectations for profit.
On Morgan Stanley's numbers, the NAB share price is valued at under 13 times FY23's estimated earnings with a projected grossed-up dividend yield of 7.5%.
