Why did the NAB share price surge 8% in July?

Last month was excellent for bank shareholders.

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Key points

  • Competition worries are easing, which may have helped the NAB share price last month
  • Cashbacks by the large lenders and strong competition from Macquarie have largely slowed
  • Higher interest rates helped increase lending earnings, and the net interest margin (NIM) could be better than previously feared

The National Australia Bank Ltd (ASX: NAB) share price climbed by 8% in July, outperforming the S&P/ASX 200 Index (ASX: XJO) which only went up by around 3%.

It may be surprising that ASX bank shares have gone up over the past few weeks considering there is still plenty of competition in the banking space.

Keep in mind that NAB hasn't announced anything that was considered price sensitive to the market since the FY23 half-year result in May.

Competition and margin pressure have been key themes over the last six months. The mood seems to be changing.

What's going on now?

A few months ago, every major bank was offering cashbacks and attractive interest rates to try to retain and attract borrowers.

We've heard that many of the main players have ended their cashbacks.

One of the main troubles for the major (and minor) banks was that Macquarie Group Ltd (ASX: MQG) was rapidly increasing its market share as it was able to provide loans with quick turnarounds following the application, which was attractive in a hot market.

Macquarie has now reportedly slowed its growth rate right down, according to reporting by the Australian Financial Review.

What does all of this mean? For investors, it seems to add up to a big positive for the NAB share price.

In the NAB half-year result, it said that the net interest margin (NIM) had increased by 14 basis points to 1.77%. The bank said that it was making higher earnings on its deposits and capital because of the higher interest rate environment, which was partially offset by "home lending competition" and higher funding costs.

It's possible that we may have already seen the peak NIM for this cycle, but the slowing competition may mean that the NIM isn't pushed as low, or hurt as long.

The NIM is key because it tells investors how much profit the bank makes on its total loan balance to borrowers. The more the better, assuming the higher interest rates don't hurt borrowers too much.

I wouldn't be surprised if NAB shares don't do much for the next week until we get some insights into the banking sector from the Commonwealth Bank of Australia (ASX: CBA) result which is due to be handed in next week.

NAB's financial period, which runs to the end of September 2023, won't be reported for another few months.

NAB share price snapshot

Despite the recent rise, NAB shares are still down more than 2% from the beginning of the year, as we can see on the chart below.

Created with Highcharts 11.4.3National Australia Bank PriceZoom1M3M6MYTD1Y5Y10YALL31 Dec 20221 Aug 2023Zoom ▾Jan '23Feb '23Mar '23Apr '23May '23Jun '23Jul '23Aug '23Jan '23Jan '23Mar '23Mar '23May '23May '23Jul '23Jul '23www.fool.com.au

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 positions in and has recommended Macquarie Group. The Motley Fool Australia has positions in and has recommended Macquarie Group. 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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