UBS upgrades NAB, highlights three top financial stocks

If there’s one thing Australian investors find as frustratingly expensive as house prices, it’s the shares of the major banks that lend to them.

That’s why a new report from UBS caught our attention this week, with the broker upgrading one of the Big Four to Buy after a long period of caution across the sector.

While recent headlines have focused on rivals like CBA (ASX: CBA) and Westpac (ASX: WBC) attempting to eat into NAB’s dominance in business banking, UBS believes the bank is not only holding its ground, but doing so profitably.

“We think NAB has defended the onslaught around its market position in business banking admirably over the past few years and is now likely to benefit from continued structural growth in overall business lending,” UBS analysts led by John Storey said in a report.

The broker also points to a more settled management team under CEO Andrew Irvine, and notes that NAB’s underperformance in 2025 has left it trading on the same valuation multiple as Westpac, despite delivering higher profitability (return on equity of 11.0% versus 9.9%).

“This anchors our upgrade to Buy,” Storey said.

That said, the broker cautioned investors should continue to monitor NAB’s Tier 1 capital position and the performance of its business banking loan book as interest rates are poised to rise.

UBS set a 12-month price target of $47 and expects NAB to pay a fully franked dividend yield of 4.2% in FY26. In comparison, Westpac remains a Neutral, while ANZ and CBA are rated Sell. UBS also noted that CBA’s shares could fall around 16% this year to $125, with the lowest forecast dividend yield among the majors at 3.5%.

Brokers thawing on the Big Four

NAB isn’t the only bank seeing sentiment improve.

Earlier this year, Citi upgraded ANZ to Buy, lifting its price target to $40.30 and forecasting a 4.6% dividend yield. Citi’s call was driven largely by ANZ’s cost discipline, with the bank expected to be the only Big Four reducing costs in FY26.

ANZ’s underlying costs are forecast to fall 3% in FY26, compared with around 5% growth at NAB and CBA, while Westpac remains Neutral.

“Despite a strong year of outperformance in 2025, we see ANZ entering 2026 benefiting from strong tailwinds from management execution on costs and strategy, a favourable macro environment, and a still undemanding valuation versus peers,” Citi analysts Thomas Strong and Nilesh Bhaiya said in a report.

The recent upgrades of ANZ and NAB are worth noting, particularly after years in which the major banks have largely sat in Neutral or Sell territory following their explosive post-COVID recovery. 

Still, one swallow does not make a summer. Market Index data shows consensus ratings remain cautious - ANZ and NAB are both Holds, while CBA and Westpac sit at Sell - suggesting the sector may continue to grind rather than re-rate unless the analyst community backs the banks more broadly.

What UBS is watching this reporting season

UBS flagged that banks struggled in the last reporting season, with the sector falling around 5%, compared with a 2.7% decline for the ASX 200. The weakness was driven largely by higher-than-expected cost growth, excluding restructuring charges.

However, the market was more constructive on revenue trends, with credit growth holding up better than feared, even as expectations for net interest margins (NIMs) were revised lower.

Looking ahead, consensus expects net interest income (NII) growth of around 3–4% year-on-year, alongside cumulative NIM contraction of roughly 10 basis points through to FY30.

"As always management guidance will be a key driver of share prices from here and we look to cost guidance from underlying wage inflation and investment spend, while NIM sensitivities to rising cash interest rates will be in focus too," UBS analysts said.

More broadly, they said domestic investor feedback on Australian bank equities in 2026 continues to centre on elevated valuations, particularly at CBA, the potential for AI-driven efficiency gains, and delivery against new management targets.

UBS’s other Buy-rated bank picks

NAB isn’t the only Buy on UBS’s list. The broker also highlighted three other preferred exposures:

Judo Bank (ASX: JDO) 

Upside: 21.4% | Price target: $2.20 | Dividend yield: 0.9%

UBS continues to view Judo as a rare growth stock in an otherwise low-growth banking sector. It forecasts cash NPAT of around $170 million in FY27, with EPS growing at a ~36% compound annual rate over three years.

Macquarie Group (ASX: MQG)

Upside: 10.8% | Price target: $235 | Dividend yield: 3.4%

The investment case remains centred on asset realisations, capital deployment, performance fees within Macquarie Asset Management, and the sustainability of profits across key divisions.

Bank of Queensland (ASX: BOQ)

Upside: 10.7% | Price target: $7.50 | Dividend yield: 6.0%

UBS said simplification, strategic execution and balance sheet de-risking have supported BOQ’s valuation over the past year. Further upside could come from more efficient capital use, including risk-transfer strategies and partnerships with private capital providers.

Why CBA remains a Sell

CBA remains a Sell across consensus, with brokers continuing to cite valuation concerns relative to history and peers.

While UBS acknowledges the strength of CBA’s business banking strategy and its ability to grow mortgages faster than the system if it chooses, it struggles to justify the bank’s elevated valuation.

“We like CBA’s strategy, but its valuation leaves little room for error,” Storey said.

Finally, UBS expects dividend growth across the sector to remain modest. ANZ and NAB are expected to broadly maintain payouts, CBA’s dividend growth is forecast at around 3%, while Westpac stands out with expected dividend growth of around 10%, albeit from a lower base and still below peak cash payouts seen in the late 2010s.