The NAB share price has gained 10% in 3 months. Too late to buy?

Is one of the ASX's biggest banks a big opportunity?

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Key points

  • Share markets are volatile, but NAB shares keep rising
  • Broker Citi has just rated the big bank a buy 
  • The broker is positive because of the likelihood of rising lending margins

The National Australia Bank Ltd (ASX: NAB) share price has climbed more than 10% in the past three months. After this sizeable increase, is the ASX bank share still worth banking on?

There's a lot for investors to take in at the moment – inflation is rampant. Central banks are increasing interest rates to try to get things under control.

Higher interest rates are typically good news for banks because they can charge more for their loans while not increasing interest rates for savers by as much. This can lead to a higher profit margin for banks, measured as the net interest margin (NIM).

Is the NAB share price still a buy?

The broker Citi certainly thinks so, according to reporting by The Australian.

While NAB may be up over the past three months, the NAB share price currently shows a decline of 2.5% in the four weeks since 18 August 2022.

Citi's Brendan Sproules upgraded NAB to a buy, saying the bank was seeing "strong business lending momentum".

He believes that banks will benefit from a stronger NIM. He added that FY23 marked "a distinct shift in the tide" for banks after the pandemic:

Banks are now sitting on an excess liquidity build the size of which has not been seen in history, with central banks set to embark on their quickest and largest tightening seen in over 30 years.

This should generate a material initial return on that abundant liquidity sending FY23 NIMs sharply higher by about 30bps.

However, 2024-25 is likely to see this excess liquidity evaporate, particularly as the term funding facility is repaid, accelerating deposit competition, sending funding costs higher, and possibly ongoing mortgage competition, all pulling NIMs back.

Citi increased its price target for the NAB share price to $32.75. The current price of $30.34 implies a possible rise of close to 8%.

Valuation

The price/earnings (p/e) ratio isn't everything, but it can give insights into the valuation of a business and enable comparison between companies.

Using Citi's estimates, NAB shares are valued at 14x FY22's estimated earnings and under 12x FY23's estimated earnings.

The dividend may be important to investors, so let's look at the expected income.

For FY22, the bank expects a grossed-up dividend yield of 7.1%, with the FY23 grossed-up dividend yield a predicted 8.75%.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. 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 Scott Phillips.

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