Are NAB shares a good investment ahead of earnings season?

One broker says buy while the other says another big four bank is a better choice.

Key points
  • The National Australia Bank share price is in the green today at $31.74 and up almost 5% over the past month
  • One broker says NAB shares are a buy; the other says another big four bank is a better choice
  • NAB will provide a first-quarter FY23 trading update on 16 February during earnings season 

The National Australia Bank Ltd (ASX: NAB) share price is in the green today and up almost 5% over the past month. NAB shares are currently trading at $31.74, up 0.22% for the day so far.

As we head into the February/March earnings season, the big four ASX bank share is due to release its first-quarter FY23 trading update on 16 February.

Meantime, we await the Reserve Bank's first interest rate decision of 2023 on Tuesday 7 February.

Most commentators predict another 25-basis point increase. Generally speaking, rate rises can be good for bank shares because it means the banks can charge their home loan borrowers more interest.

The downside of rate rises is fewer new home loans are taken out as more buyers fail serviceability requirements, and it can raise the number of bad debts too.

A man leans forward propped on his elbows as he holds his clasped hands to his mouth in a worried pose as he gazes at his computer screen in a home setting.

Image source: Getty Images

The case for buying NAB shares

As my Fool colleague James reports, Goldman Sachs is a fan of NAB shares. The broker rates them a buy with a 12-month price target of $35.41.

In addition, Goldman is expecting NAB shares to deliver a $1.73 per share dividend in FY23.

Last week, the broker gave three reasons to buy NAB shares, starting with its large commercial lending exposure.

Goldman said:

Our Buy rating on NAB is predicated on: i) NAB providing the best leverage to the thematic that domestic volume momentum will favour commercial over housing volumes over both the short- and medium-term, ii) our expectation that commercial lending will be better insulated from competitive pressures particularly prevalent in mortgage lending.

The broker also said the bank has made superior strides in its cost management initiatives compared to its peers. Goldman said this has "allowed the highest levels of productivity over the last three years".

About $400 million in productivity savings is expected in FY23.

Another big four bank is better, says this broker

According to The Australian, Morgan Stanley reckons Westpac Banking Corp (ASX: WBC) shares are a better choice than NAB shares.

The broker thinks that banks' profitability and valuations are "harder to predict" in today's inflationary economy.

In a recent note, Morgan Stanley said:

For now, margin expansion and resilient credit quality underpin the earnings outlook. However, the size and speed of the tightening cycle creates the prospect that weaker volume growth, declining margins, higher costs and rising loan losses weigh on the banks' share price performance in the second half.

In terms of NAB shares specifically, Morgan Stanley has an equal-weight rating and a $30 price target.

The broker likes NAB's growing track record of execution, its operating performance, and margin improvements.

In its full-year results released in November, NAB reported an 8.3% bump in its statutory net profit. It also reported an improving net interest margin (NIM) with a final quarter exit margin of 1.72%.

Several other banks also recorded raised exit NIMs as a result of rising interest rates.

Morgan Stanley has given Westpac shares an overweight rating and a price target of $24.

The broker likes Westpac's "upside to consensus margin estimates from higher rates, a differentiated cost outlook and good progress on the cost reset plan".

It also notes "signs of improving franchise performance, a relatively low risk profile, low investor expectations and supportive trading multiples".

Motley Fool contributor Bronwyn Allen has positions in Westpac Banking. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Goldman Sachs Group. The Motley Fool Australia has recommended Westpac Banking. 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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