On Wednesday the National Australia Bank Ltd (ASX: NAB) share price edged lower following the release of its third quarter update.
NAB revealed that its cash profit for the period rose 1% over the prior corresponding period to $1.65 billion thanks to its net interest margin (NIM) improving.
However, one negative that may have spooked investors was its bad debt data. Loans that are 90 days or more past due climbed 14 basis points over the June quarter 2018 to 0.85%. This is the highest level since the fourth quarter of 2017.
Should you buy NAB shares?
Whilst the latter metric is a bit of a concern, I think it is a little soon to get carried away. As a result, I continue to believe its shares would be a good option for investors that have limited exposure to the banking sector.
One broker that agrees with this view is Goldman Sachs. According to a note out of the investment banks, its analysts have retained their buy rating and $30.45 price target on the bank's shares.
This price target implies potential upside of over 10% excluding dividends or around 16% including them.
What did Goldman Sachs think of its update?
Goldman appeared to be pleased with the third quarter update and notes that the bank is tracking ahead of its forecast for the second half.
It said: "The small beat was driven by better-than-expected revenues which were up 1% on the 1H19 quarterly average, driven by seasonally stronger SME loan growth and a higher group NIM, resulting in PPOP run-rating c. 2% ahead of our current 2H19E estimates. Asset quality remains benign with the A$247mn BDD charge broadly in line with our current 2H19E forecasts, though we note there was a noticeable tick-up in problem loans, up 6 bp in the quarter to 0.85% driven by mortgage delinquencies."
However, the broker suspects that its margin performance could soften in the fourth quarter due to the the impact of the June and July 2019 RBA cash rate cuts. Especially after reading through recent updates by Commonwealth Bank of Australia (ASX: CBA) and Bendigo and Adelaide Bank Ltd (ASX: BEN).
Nevertheless, Goldman continues to rate NAB as a buy and believes this quarterly update highlights the operational benefits NAB will continue to enjoy from its overweight position in small to medium sized business lending.
