National Australia Bank Ltd (ASX: NAB) and its 3 “big bank” counterparts dominate both Australia’s and New Zealand’s financial markets. From mortgages right through to financial planning, they’ve got it covered.
NAB’s residential mortgage portfolio mightn’t be as big as Westpac Banking Corp’s (ASX: WBC) or Commonwealth Bank of Australia’s (ASX: CBA) but, in the money making machine that is Australian housing, it’s still a force to be reckoned with. At 31 December 2013 it had $204 billion in outstanding residential loans.
It also controls huge proportions of the Australian business lending and agribusiness markets. Currently, APRA believes its customer base accounts for 24.6% and 25.7% of them respectively. In New Zealand it holds 26.6% of business lending and 21.7% of agribusiness.
Despite controlling 15.2% of household lending and a big portion of the local business banking and agribusiness markets, NAB’s shares trade on a trailing price to earnings ratio of 13.6. Although this could seem quite high for a bank, in comparison with its local peers it could come across as cheap. For example, Australia and New Zealand Banking Group (ASX: ANZ) trades on a trailing P/E of 15.6.
So why does NAB trade so cheap? I’ve put it down to two things.
Firstly, NAB’s UK expansion has been a waste of shareholders’ time and money. The UK property market has, for a number of years, been unimpressive. In addition bad commercial debts continue to plague the bank and will likely need a few more years to be paid off completely unless management can divest away from them in the meantime.
Second, NAB’s domestic operations remain much less profitable than its peers. For example, of the big banks, NAB has the lowest return on equity (ROE), highest cost to income ratio and thinnest net interest margin.
An even better buy then NAB
NAB currently trades on the cheapest multiples of the big banks and with the highest forecast dividend yield, currently 5.8% fully franked. However based on its track record and ongoing troubles in a number of key markets, it deserves its current price. I believe it’s fairly valued at current prices so before hitting the buy button I’d like to see a lower share price or a divestment away from its troubled UK assets.