Could the best be yet to come for the NAB share price?

Are NAB shares an undervalued opportunity despite their ongoing performance?

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Key points

  • NAB shares have provided shareholders strong outperformance in 2022
  • The bank’s net interest margin (NIM) is expected to rise in the short term as it benefits from rising interest rates
  • Brokers don’t think the NAB share price will rise much further from here, in the short term at least

The National Australia Bank Ltd (ASX: NAB) share price has been a strong performer in 2022 to date. It's up around 9%. That compares to the S&P/ASX 200 Index (ASX: XJO) which is down 10.4%.

NAB has outperformed the ASX share market by approximately 20%, which is significant for a blue-chip ASX share.

Before considering the upcoming period, let's consider what may be helping the NAB share price.

Higher interest rates and profit growth

NAB is one of the main ASX 200 bank shares, with a loan book of many billions.

What margin it makes on its lending is an important factor for NAB's bottom line.

With interest rates on the rise, this is expected to help the NAB's net interest margin (NIM). This measure compares the bank's lending rate against the cost of the money it's lending. One of the main examples of this is the amount banks pay on savings accounts.

With savings accounts not getting the same interest rate boost as loans, banks are expected to earn higher profits, at least in the shorter term.

Even before the ramping up of interest rates, NAB was already reporting that its net profit after tax (NPAT) was growing. For example, in early May, NAB revealed that its FY22 half-year cash earnings had increased 4.1% to $3.48 billion.

Can the NAB share price keep rising?

The profit boost from rising interest rates may only be part of the picture — and it may not all be positive, particularly over the longer term.

The Australian Financial Review has reported comments from Jarden analyst Carlos Cacho on the situation with rising interest rates:

While this is clearly positive for the sector, especially the major banks with their large low-cost deposit bases, we believe it is likely only a temporary benefit before deposit competition returns and the cash rate is eventually cut again.

The broker Citi currently has a buy rating on NAB, though the price target is only $32.75. That implies a very small rise in the NAB share price over the next year. The broker is expecting good profit growth from NAB in the shorter term, thanks to a stronger NIM and high liquidity.

However, the broker Morgan Stanley is less optimistic. It has an equal-weight rating, essentially a hold rating, however, the NAB share price target is $29.60. That suggests a possible fall of around 7.5% over the next year. It thinks that economic uncertainty could mean the NAB share price may not rise.

The NAB full-year result is expected to be released on 9 November 2022.

Citi thinks that NAB's grossed-up dividend yield for FY22 will be 6.7%. Morgan Stanley also estimates that the NAB grossed-up dividend yield will be 6.7%.

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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