4 facts you need to know about National Australia Bank Ltd

Investors in bank shares need to be alert to the risks.

With the worst performing stock price amongst the four majors, National Australia Bank Ltd. (ASX: NAB) is on the nose with many investors. In fact over the past 5 and 10 years investors would have been better off owning the equivalent of the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) than owning NAB shares.

For investors who see this underperformance as a buying opportunity here are 4 facts you need to know first.

1)      Dividends keep on growing – In the 2013 financial year (FY), NAB paid dividends totalling $1.90.  This is 4 cents less than the record, which was set in FY 2008 just before the depths of the global financial crisis hit and forced the board to pay a reduced dividend of $1.46 in FY 2009. At the recent interim results the board upped the interim dividend to 99 cents which is the highest interim dividend ever paid and sets the scene for a new record final and full year dividend to be paid this year.

2)      Australia’s leading Business Bank – Another appealing attribute of NAB is its leading market share of business lending. Historically, the Business Banking division has enjoyed one of the highest net interest margins across the group making it a particularly important contributor to the group. However, according to the Reserve Bank of Australia, NAB’s market share has declined from 22.3% a year ago to 21.6% today – investors need to monitor this closely.

3)      Key metrics – The net margin is a key metric to consider when analysing a bank. For NAB shareholders it isn’t great news as this margin has fallen from 2.03% in March 2013 to 1.94% in March 2014. On a more positive note, the Basel III Common Equity Tier 1 (CET1) ratio has improved. CET1 was 8.64% at the recent interim results, up from 8.43% at FY13.

4)      Valuation – Annualising the recent diluted interim cash earnings per share suggests NAB may earn $2.62 per share in FY 2014. With the share price at $34.22, this implies a forward price-to-earnings ratio of 13.1. On first take some investors may think this multiple looks reasonable but it is important to remember that historically banks have traded on lower multiples because of their higher risk profiles.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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