October is almost here, and National Australia Bank Ltd (ASX: NAB) is one ASX bank share I would be happy to buy.
With NAB shares trading around $39.13, I think there is a solid case for adding them to a portfolio next month. Here is why.
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A solid earnings outlook
I would not expect explosive growth from NAB. Consensus forecasts point to earnings per share (EPS) of $2.38 in FY26, rising to $2.54 in FY27.
At today's share price, that values NAB on a PE ratio of around 16 times FY26 earnings and just over 15 times FY27 earnings.
I think that is a reasonable price for one of Australia's largest banks, particularly given NAB's strong position in business banking.
That part of the company is one of the main reasons I like it. Australian businesses need banking services across lending, payments, deposits, and other areas, giving NAB another avenue for earnings beyond the highly competitive mortgage market.
What could higher interest rates mean?
The prospect of further Reserve Bank of Australia interest rate rises complicates the outlook somewhat.
Higher rates can be positive for banks if they allow lending rates to rise in a way that supports net interest margins, which measure the difference between what a bank earns on loans and pays for its funding.
But there is another side to that equation.
Higher borrowing costs put more pressure on households and businesses. If rates climb too far, credit growth could slow, customers may become more cautious about taking on debt, and bad debts could eventually increase.
Competition also plays a role. Banks cannot simply assume that every increase in the cash rate will translate into better margins when they are competing for both borrowers and deposits.
For me, that means another RBA rate rise would not automatically strengthen the NAB investment case.
I would instead focus on how the bank manages margins, credit quality, and lending growth through the changing rate environment.
The dividend adds to the case
Passive income is another reason investors may be interested in NAB shares.
Consensus forecasts point to fully franked dividends of $1.70 per share in FY26 and $1.72 in FY27.
At $39.13, the FY26 forecast represents a dividend yield of around 4.3%, before including the benefit of franking credits.
The expected increase in FY27 is small, but the important point for me is that analysts currently expect the dividend to remain well supported with manageable payout ratios of around 71% and 68%.
Foolish takeaway
NAB is not the sort of share I would buy expecting spectacular growth over the next 12 months.
What I see instead is a major bank with a strong business banking franchise, a reasonable forward valuation, and a fully franked dividend that could provide an attractive income stream.
Interest rates could make the next year a little more complicated, particularly if borrowers come under greater pressure. But at around $39, I think there is enough in NAB's favour for me to be comfortable adding the shares in October and holding them for the long term.
