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Why Citi thinks it’s time to sell your National Australia Bank Ltd shares

Credit: NAB

Financial news wires are reporting that analysts at Citigroup think it’s time to sell your National Australia Bank Ltd (ASX: NAB) shares thanks to their high valuation and the toughening outlook for the Australian banking sector in particular.

Today NAB shares change hands for $32.64 and have climbed 12.5% over the past year, although the bank has now been unable to lift its dividend payout for three consecutive half-year periods.

Recent problems for the bank to navigate included the need to strengthen its capital adequacy and wholesale funding position in a bid to satisfy prudential regulators, while adding some ballast to its balance sheet.

The NAB has also gone through a substantial restructure recently in divesting some of its overseas operations to focus on its profitable residential property and business lending operations. Still, this reportedly isn’t enough for Citi analysts who believe the shares are overvalued partly because of the toughening regulatory environment.

Bank levy

The big news last week was the federal government’s plans to slap a 6 basis points levy on significant parts of the major banks’ borrowings in a move partly justified by the liquidity insurance the taxpayer effectively provides with the Reserve Bank acting as a lender of last resort. This status quo effectively means the banks can borrow at cheaper rates on capital markets and as a quid pro quo the government is imposing a levy that reportedly could raise more than $6.2 billion.

News reports last week also suggested that analysts believe the levy could lop as much as 5% off the big banks’ annual profits, which is bad news for all including the likes of Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA).

No wonder their share prices came under pressure last week, although it’s worth noting that the banks will likely try and pass some of the cost of the levy onto consumers via higher lending rates and fees. One big worry for the government is probably that the banks retaliate by lifting home loan lending rates in a move that could see the government being blamed for house prices coming under pressure.

The other stakeholders likely to be affected are shareholders as dividend payouts may also come under pressure if the banks cannot find a way to pass on the levy.

If you’re a defensively-minded income seeker the big banks remain sound investments at the right price and some patience may see prices get cheaper once the levy takes effect. Like Citi, I would prefer a cheaper price for NAB shares, although I still believe this is a bank with strong prospects likely to provide good total returns to dividend-seeking shareholders over the long term.

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The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of National Australia Bank Limited. Motley Fool contributor Tom Richardson has no position in any stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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