The National Australia Bank Ltd (ASX: NAB) share price has risen approximately 10% in the last month. After such a strong short-term performance, let's look at whether the ASX bank share can keep rising from here.
It has been a volatile year for the bank, as we can see on the chart below.
The market has been digesting the impact of both higher interest rates and a competitive environment for the banking sector.
Just look how many lenders are on the ASX, such as ANZ Group Holdings Ltd (ASX: ANZ), Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA), Macquarie Group Ltd (ASX: MQG), Bank of Queensland Ltd (ASX: BOQ), Bendigo and Adelaide Bank Ltd (ASX: BEN) and Pepper Money Ltd (ASX: PPM).
No one wants to lose market share, so the banks have been doing their best to retain and win new customers.
Competition is lessening
The net interest margin (NIM) is one of the most important profitability measures for a bank. It tells investors how much profit a bank makes on its lending, comparing the overall loan rate to the cost of that money (such as term deposits and savings accounts).
Banks have been warning that competition has been hurting the NIM during 2023.
Recently we've heard that multiple lenders were ending their cash backs. To me, this is a promising sign that the pressure on NIMs could be reducing and that the monthly margin can stabilise from here. That could be a factor in why the NAB share price has been rising.
Are arrears going to rise?
Another major consideration is what's going to happen to lending arrears after all of the interest rate rises.
According to Australian Financial Review reporting on S&P data, the overall amount of mortgages in arrears across the country is around 1%. That's not necessarily NAB's arrears figure, but the total lending system.
While NAB isn't going to release its FY23 result during August because of its different reporting period (which runs to September on an annual basis), I think the market may extrapolate what's happening with CBA's loan book to the other major banks. CBA is due to release its result on 9 August 2023.
I'd imagine there will be higher arrears in the upcoming NAB and CBA results because of all of the interest rate rises. How bad (or not) the arrears are will impact bank credit provisions, cash flow and possibly NAB's dividend.
The share prices of NAB, CBA, Westpac and ANZ tend to move in the same direction over time – the CBA report and its data are likely, in my view, to have a key influence on the banking sector this month.
Inflation and interest rates
The final point I'll note is that any Reserve Bank of Australia (RBA) move could be a factor too.
Australian Bureau of Statistics (ABS) data showed that Australia's annual inflation was 6%, a little less than expected for the 12 months to June 2023, and 1.4% for the quarter. The inflation rate is reducing, but it's still running hotter than what the RBA would like.
The improving inflation situation may mean that the RBA won't increase rates in August. However, the US Federal Reserve just increased the US interest rate by another 25 basis points (0.25%), so we can't assume the RBA is done for good.
A higher RBA interest rate could hurt NAB's borrowers even more, so no more rate rises would be better for the NAB share price in August and beyond.
