Top broker names NAB (ASX:NAB) shares as the best in the banking sector

This leading broker has named National Australia Bank Ltd (ASX:NAB) as the bank share to buy right now. Here's why…

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Goldman Sachs has been busy looking through the banking sector following the recent release of updates.

Overall, the broker was pleased with what it saw and believes things will continue to improve in the near term.

What did Goldman say?

Goldman commented: "1H21 reported PPOP/cash earnings were up 14%/108% on pcp. Into 2H21E, we believe that lower funding costs should largely offset the pressures on NIMs from competition and lower rates. On volumes, we expect system housing loan growth to continue to recover to >5% and business lending to pick up slightly. We continue to see costs as a key determinant of relative sector performance, and while all banks are now focused on reducing their absolute cost bases, each bank is at different stages in reaching this goal. Finally, capital returns are likely to become a feature of bank TSR in 2H21."

The broker now believes it is onwards and upwards for pre-operating provision profit (PPOP) growth in the sector. It is also positive on returns and bad and doubtful debts.

It explained: "Having fallen by >20% over the last five years, we now forecast sector PPOP RoRWA (the key determinant of sector valuation, in our view) to rise over the next three years, supported by improving productivity."

Goldman believes this, combined with cost cutting, potential provision releases, and capital management, means the banks are trading at an unnecessary discount to their industrials peers.

"Coupled with i) the potential for further efficiency benefits if banks reach their stated cost targets, ii) the potential for further collective provision releases given the continued improvement in economic conditions, and iii) our capital forecasts indicating that the major banks potentially have between A$6.3 bn (ANZ) and A$11.1 bn (CBA) of surplus which should allow for capital returns, we think the 35% discount the banks are currently trading on versus the non-bank industrials (vs. 20% historical average discount) is too great and note our analysis of relative fundamentals can only explain about half of this relative PER deterioration," it explained.

Which bank is Goldman's top pick?

Goldman has named National Australia Bank Ltd (ASX: NAB) as its preferred sector exposure.

This is due to its cost management initiatives, which it notes are further progressed relative to peers and should drive productivity benefits sooner, its strong business banking position, and its robust capital position.

The broker has a conviction buy rating and $29.97 price target on the bank's shares. Based on the current NAB share price of $26.05, this implies potential upside of 15% over the next 12 months. This stretches to approximately 20% if you include dividends.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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