Should you buy National Australia Bank Ltd?

National Australia Bank Ltd (ASX: NAB) has one of our country’s most iconic brands and employs over 42,000 people globally. Yet, as a listed company in the stockmarket, it continues to underperform both the S&P/ASX 200 (ASX: XJO) (^AXJO) and its closest peers.

So is it an opportunity to bag-a-bargain or is there an important reason why investors should be avoiding this seemingly discounted blue-chip stock? Here are four reasons I think it should be avoided, for now.

1. Its shares are not cheap. By historical standards its current price-earnings (P/E) and price-book (P/B) ratios are above average. Currently its P/E ratio is 13 and P/B ratio is 1.83. Some banking analysts consider a P/B ratio of 0.5 as a good entry point.

2. It is the least profitable big bank. Compared to its peers, such as Australia and New Zealand Banking Group (ASX: ANZ), NAB has the highest cost to income ratio (currently 45.4%), lowest Net Interest Margin (currently 1.94%) and lowest return on equity (currently 14.6%). Although you could take a contrarian view of NAB’s shares, its profitability has fallen since 2006 and doesn’t appear likely to turnaround anytime soon.

3. It has £3.3 billion in UK property which is included in the bank’s “run-off portfolio”. It has been running down these loans for a number of years yet they are still weighing on earnings.

4. NAB will struggle to beat the market. Although, arguably, it has the potential for upside surprises, its high share price coupled with falling profitability make it a questionable long-term investment.

To buy or not

NAB shares appear cheap but for good reason. It lags its peers in almost every area and profitability continues to fall across a number of valuation metrics. Therefore, in my opinion, it’s not a buy, even at current prices.

However it does deserve a spot on your watchlist because, despite its blemishes, it offers a strong dividend yield and if it can successfully rundown the remaining UK commercial loan portfolio over the next two to three years, or if its share price drops significantly, it’ll be worth a second look.

But don’t rest on your laurels! While you wait for NAB shares to drop, you could consider adding other high yielding growth stocks to your portfolio…

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

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