The 2024 calendar year is shaping up to be one of the best-ever years for National Australia Bank Ltd (ASX: NAB) shares. The stock is currently up 26% year-to-date.

However, as we all know, past performance is not a reliable indicator. So, the question is – can NAB deliver another good return in 2025?

The market is clearly more confident about the bank's prospects than at the start of 2024.

However, the recent FY24 result was not exactly inspiring. Statutory net profit after tax (NPAT) declined 6.1% to $6.96 billion, while cash earnings fell 8.1% to $7.1 billion. The bank grew its full FY24 dividend by 1.2% to $1.69 per share.

NAB blamed the result on a lower net interest margin (NIM). The NIM is the profit that a bank makes on its lending. It compares the loan rate to the cost of funding those loans (such as term deposits). The NIM decline primarily reflected "home lending competition, higher term deposit costs and deposit mix impacts".

The bank's costs increased 4.5% due to inflation of wages, restructuring costs and continued investment in technology modernisation and compliance capabilities.

But, FY24 is the past. Let's consider what the outlook is for 2025.

Expert views on NAB shares

A report from Creditorwatch explained how high asset prices are helping maintain the profitability of banks. A high house price minimises the chance of a bad debt for the bank if the property needs to be sold to repay the mortgage from the bank. It said:

Elevated and/or rising asset prices are likely an important explanation of this conundrum, with the household sector in aggregate having deleveraged significantly in recent years as house and share prices have risen sharply. And for many of the still relatively low share of households getting into financial difficulty, the 20-40% rise in house prices since before COVID generally means that the asset can be sold often at a profit and almost always without a significant impact on bank losses.

This is not to say that many are not doing it tough – indeed we hear frequently of significant increases in demand for food support services. However, the data so far suggests that these pressures are not showing up in significantly increased pressures or losses for financial institutions. Where there is some greater pressure reported is on newer non-bank lenders.

The broker UBS is quite pessimistic about the valuation. It currently has a sell rating on NAB shares.

A price target tells investors where an expert thinks the share price will be in 12 months from the time of the investment call. UBS currently has a price target of $35 on the bank, implying a possible fall of approximately 10% within the next year.

UBS is expecting weaker-than-the-market loan growth, worsening loan arrears and rising credit losses, increased competition in business banking, and higher costs.

When UBS issued the note in November, when the NAB share price was $39.33 – similar to today – it said NAB shares were trading on a 2-year forward price-earnings (P/E) ratio of 16.5x, compared to its 15-year historical average of 11.6x. In other words, they're trading expensively.

Financial forecasts

UBS is forecasting that in FY25, owners of NAB shares could see their bank generate $20.85 billion of revenue, $10.2 billion of pre-tax profit and $7.2 billion of net profit. That would mean slightly higher profit generated than FY24, though not enough for UBS to think it's compelling, it seems.

However, growing profit is one of the best things NAB can do to improve shareholder returns over the long term, not just in 2025.