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National Australia Bank Ltd Vs Westpac Banking Corp: Which to buy?

National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) are two of Australia’s biggest banks, with huge customer bases and market shares across a number of extremely lucrative products such as mortgages, agribusiness, personal loans and business banking.

However despite both of their share prices growing much quicker than the S&P/ASX 200 (ASX: XJO) (INDEX: ^AXJO) over the past 12 and 24 months, they offer investors different growth prospects. Let’s take a quick look at which one is best positioned to grow your wealth in the next five years.

Name Westpac Banking Corp National Australia Bank Ltd  
Stock ticker ASX:WBC ASX:NAB
Recent share price $34.77 $33.81
Market Cap $107 billion $78.9 billion
Price-Earnings Ratio | 10-year Average 15.5 | 12.95 13.6 | 12.4
Dividend Yield 5.1% 5.8%
Price to Book ratio 2.30 1.83
Net Interest Margin 2.11% 1.94%

Data sourced from Morningstar

As can be seen from the above, Westpac is a much larger bank and, as a result, has been able to grow strongly in the past two decades on the back of continuous growth in the housing sector or, more specifically, mortgages. It derives a huge part of its earnings from its Australia Financial Services division which includes retail and business banking operations throughout Australia.

It has 23% of Australian household deposits, 23% of the Australian housing market and 20% of New Zealand consumer lending. This helped the bank grow earnings 8% to $3.722 billion for the first half of 2014. Recently however its dominance in key markets and conservative balance sheets has pushed up its share price to a staggering price-book ratio of 2.3 and PE ratio of 15.5.

In contrast, NAB is the cheapest big bank, currently on a price book ratio of 1.83 and trailing PE ratio of 13.6. This can be attributed to the bank’s troubled UK assets and poor level of profitability in local markets, which have hindered its performance. This is evident from its low net interest margin and return on equity.

However it currently controls more than 20% of both agribusiness and business lending in Australia and New Zealand and approximately 15% of housing lending. Despite its comparatively cheap share price, until management can rid the bank of the troubled UK commercial loans and divest away from the UK Banking division altogether, it would be hard to justify buying some of its shares.

The Best BUY of all

Despite Westpac controlling a huge portion of Australia’s financial markets, I believe it is expensive given the increased likelihood of lower earnings growth in the next 5 to 10 years. NAB however could be the dark horse of the “Big Four” but many investors who’ve waited for its fortunes to turnaround have been bitterly disappointed, given the bank has returned a meagre 11% capital gain over the past 10 years. As such I believe, neither of these two big banks are a good ‘BUY’ at current prices.

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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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