NAB shares drop lower on broker downgrade news

The National Australia Bank Ltd (ASX:NAB) share price has dropped lower on Wednesday after the banking giant was downgraded by analysts at Macquarie Group Ltd (ASX:MQG)…

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The Australia and New Zealand Banking Group (ASX: ANZ) and Commonwealth Bank of Australia (ASX: CBA) share prices have pushed higher today and are each up approximately 0.2% in early afternoon trade.

The same cannot be said for the National Australia Bank Ltd (ASX: NAB) share price, though. At the time of writing the banking giant's shares have dropped 0.3% lower to $24.52.

Why is the NAB share price underperforming today?

With no news out of NAB, today's decline appears to be attributable to a broker note out of the Macquarie Group Ltd (ASX: MQG) equities desk this morning.

According to the note, the broker has downgraded NAB's shares to a neutral rating from an outperform rating.

Macquarie's analysts have also taken an axe to their price target and cut it down by a sizeable 10.5% to $25.50 from $28.50.

The broker made the move due largely to concerns that the bank will not be able to maintain its current pay out ratio.

Last year NAB paid a dividend of $1.80 per share, equating to 85% of its earnings. But Macquarie isn't convinced that this will be possible beyond FY 2019 due largely to potential capital concerns following the recent announcement out of the Reserve Bank of New Zealand (RBNZ).

For those that missed it. In December the RBNZ advised that it is proposing to raise the amount of capital New Zealand banks must hold in order to strengthen the New Zealand banking system and further protect depositors by reducing the likelihood of bank failures.

NAB has exposure to this market through its New Zealand subsidiary, Bank of New Zealand.

NAB estimates that, based on the proposals set out by the RBNZ and Bank of New Zealand's balance sheet as at 30 September 2018, the recommendations would imply a potential Tier 1 capital increase of NZ$4-5bn (A$3.8-4.7bn) for the New Zealand based bank.

In light of this, Macquarie has forecast a dividend cut to $1.68 per share in FY 2020.

Should you invest?

While I think that Macquarie makes a fair point on NAB and I have previously suggested a dividend cut may be coming, I'm optimistic that its strong position in a business lending market which is performing strongly will help it overcome its challenges and maintain its dividend.

As a result, I still see NAB shares as a buy, though I would suggest investors hold fire until after the release of the Royal Commission final report next week.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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