Is now a good time to buy NAB?

In a break from tradition, National Australia Bank (ASX: NAB) is currently the best performer among the big four banks, as it benefits from an improved global outlook and several broker upgrades.

Since the start of the year, the share price has risen around 40%, dwarfing the gains made by rivals Commonwealth Bank (ASX: CBA), ANZ (ASX: ANZ) and Westpac (ASX: WBC). An improved economic outlook in the United Kingdom has provided an upside surprise and some positive market sentiment.

The NAB’s ownership of two UK banks, Clydesdale and Yorkshire, has seriously eaten into profits in recent times, as both subsidiaries struggled with bad debts and a stagnating UK economy. NAB’s net profit fell 22% to $4.1 billion in the last financial year and investors worried that the UK problems may only get worse.

However, recent surveys have pointed to an unexpected acceleration in the UK’s economic recovery. Gross domestic product numbers, including housing and manufacturing, have shown sustained improvements. This may significantly benefit the bank’s UK operations and has led the market to reappraise both their value and sell on potential.

Brokers at Macquarie and CIMB Securities retained outperform ratings on the bank in September and the stock remains in a strong bullish trend, recently reaching five-year highs above $35.

The group reports financial year 2013 results on October 31 and investors’ eyes will be looking for confirmation of improved performance in the UK and elsewhere.

Foolish takeaway

Attractive yields and economy of scale advantages have continued to support the big banks’ valuations. With the NAB’s profitability weighed down by its offshore operations in recent times, any signs of a turnaround abroad appear to renew market confidence in its future prospects. It remains a solid long-term investment, although at five-year highs the share price looks fully valued for now.

Investors worried they missed the boat with NAB still have plenty of alternatives. The Australian Financial Review says “good quality Australian shares that have a long history of paying dividends are a real alternative to a term deposit.” Get “3 Stocks for the Great Dividend Boom” in our special FREE report. Click here now to find out the names, stock symbols, and full research for our three favourite income ideas, all completely free!

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Motley Fool contributor Tom Richardson owns shares in National Australia Bank.

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