It hasn't been an easy period for Australian bank shareholders.
National Australia Bank Ltd (ASX: NAB) shares have lost substantial ground from their highs, with investors becoming increasingly cautious about the economic outlook.
But could that weakness be creating a buying opportunity?
Here's how I see it.
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What makes NAB shares worth considering?
One reason I have always liked NAB is its strong position in Australian business banking.
The bank has established relationships with businesses of all sizes, providing everything from everyday banking and payment services to financing for expansion and investment.
I think that gives NAB an attractive position in the Australian economy. As businesses grow, their banking requirements often become more complex, creating opportunities for NAB to deepen those relationships and generate additional revenue.
The bank also has a substantial presence in residential mortgages and deposits, providing another important source of earnings.
For me, that combination makes NAB a solid long-term business. It has several ways to generate profits, an established customer base, and the financial strength to reward shareholders with regular dividends.
Of course, the economic environment will influence how much those businesses can grow over the next few years.
What do rising interest rates mean?
This is probably the biggest question facing NAB and the other major banks right now.
Interest rates have been rising as the Reserve Bank of Australia attempts to bring inflation under control, and further increases could be on the way in the coming months.
For NAB, higher rates create opportunities and challenges. Banks can benefit when lending rates rise faster than the interest they pay on deposits, supporting their net interest margins.
But that benefit depends on competitive conditions. Banks are also competing hard for deposits and mortgage customers, which can limit how much additional profit they generate from higher rates.
There is also the impact on borrowers to consider. More expensive mortgages and business loans can reduce demand for credit, while prolonged pressure on household and business finances could eventually lead to higher bad debts.
I think NAB is well placed to manage these conditions, but I would not expect particularly strong earnings growth while the economy adjusts to higher borrowing costs.
Has the share price fallen far enough?
NAB shares are trading around $38.62 on Tuesday, well below their 52-week high of $49.45. That represents a decline of approximately 22%.
At this lower price, I think investors are getting a more reasonable entry point into a business that should remain profitable through the economic cycle.
Consensus forecasts point to earnings per share (EPS) of $2.38 in FY26 and $2.54 in FY27. That is modest growth, but it puts NAB on approximately 15 times forecast FY27 earnings at the current share price.
I think that looks reasonable for a major Australian bank with NAB's established market position.
There is also a healthy dividend to consider. Analysts expect NAB to pay fully franked dividends of $1.70 per share in FY26 and $1.72 in FY27.
At today's price, the FY27 forecast represents a dividend yield of approximately 4.5%, before franking credits.
For income investors, I think that provides another reason to consider the shares, particularly if the bank can maintain its profitability while interest rates remain elevated.
Foolish takeaway
I think NAB shares are worth buying around $39.
The next year could be challenging for the banking sector, and I would keep my expectations for earnings growth fairly modest.
But I like NAB's business banking franchise, and the recent share price weakness has made the valuation more reasonable.
With a healthy dividend on offer as well, I would be comfortable buying at current levels and holding for the long term.
