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Better Buy: ANZ Banking Group Vs National Australia Bank Ltd

Over the past two years Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd. (ASX: NAB) have proven to be exceptional dividend stocks. Despite being our third and fourth biggest banks, respectively, their share prices have climbed a whopping 59% and 42%.

But now, after such rapid growth, can we expect more of the same? And, if so, which bank will be most likely to maximise your gains? Let’s take a quick look at each.

Name National Australia Bank Ltd ANZ Banking Group
Stock ticker ASX:NAB ASX:ANZ
Recent share price $33.21 $33.25
Market Cap $79 billion $90 billion
Price-Earnings Ratio | 10-year Average 13.4 | 12.5 15.37 | 12.41
Trailing Dividend Yield 5.7% 4.9%
Price to Book ratio 1.8 2.03
Net Interest Margin 1.94% 2.15%
Cost to Income ratio 45.40% 44.30%
Return on Equity 14.6% 15.5%

Data sourced from Morningstar

As can be seen from the table above, ANZ is a much more efficient lender of money and, as a result, trades on a higher price-to-earnings (P/E) ratio. In recent years, we’ve witnessed ANZ’s earnings from Asia rise quickly as CEO Mike Smith’s ‘Super Regional Strategy’ gains traction.

Despite being the most efficient lender of all the big banks, ANZ hasn’t been immune to competition, which has taken its toll on margins and in the most recent half-year its Net Interest Margin (NIM) – a key measure of bank profitability – dropped to just 2.15%, its lowest level since the GFC. Although ANZ can be expected to grow more rapidly in the near future, its shares are too expensive to justify a buy rating.

On the other hand, National Australia Bank has a bigger dividend yield and trades on cheaper earnings multiples and price-to-book ratio (P/B). However it is also a much less profitable bank. Although its Net Interest Margin is just 1.94%, the Australian Banking division’s margin was as low as 1.68%! In addition the bank’s troubled UK commercial loans continue to drag on earnings. Until NAB leaves the UK or has a cheaper share price I believe it’s not a buy.

The Verdict

With both banks trading above their historical averages, net interest margins falling and earnings likely to grow at only modest rates in coming years I’m steering clear of both banks and suggest you do to, for now.

However, 1 stock I’m strongly considering buying is The Motley Fool’s #1 stock pick for 2014!  It's yours FREE. Simply click here for your copy of "The Motley Fool’s Top Stock for 2014."

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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