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Kick Off: Westpac v National Australia Bank Ltd

As the Motley Fool’s ASX World Cup gets into full swing, we have the banking titans National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC) lining up for their first playoff. Westpac has a reputation for slugging it out and rewarding its shareholders who wish to take part in its success. NAB, the serial underperformer, will have its work cut out.

Here’s how they line up

Name National Australia Bank Westpac Banking Corp
Ticker ASX: NAB ASX:WBC
Market Capitalisation $78 billion $107 billion
Forecast Dividend Yield 6.1% 5.3%
Forward Price to Earnings ratio 12.4 13.6
Price to Book Ratio 1.82 2.31
Price Earnings Growth Ratio 2.01 2.63
Net Interest Margin 1.94% 2.11%

Data sourced from Morningstar and half-year reports.

Westpac

As Australia’s second-largest bank it has a rich history of kicking goals for long-term shareholders. Although Westpac is clearly the larger bank, its shares do not come cheap – trading on a PE of 13.6 and PEG ratio of 2.63! However investors continue to buy it, despite it regularly being considered as overvalued.

With a stable funding base, 5.3% dividend and an APRA Basel III Common Equity Tier 1 ratio of 8.82% the bank has a first rate defensive structure. Although its most lucrative earnings drivers remain its 23% of Australian mortgages and 19% business market share, the domestic growth strategy is getting old, fast. In addition its strategies to focus on Asia and Wealth Management are still in their infancy.

National Australia Bank

NAB is the smallest Big Bank and trades on the cheapest valuation multiples. However it has the highest cost to income ratio (currently 45.4%), lowest cash return on equity (14.6%) and lowest net interest margin (1.94%). However, in attack, it controls 24.6% of Australia’s business banking and 31% of agribusiness banking.

Similar to Carlton in the AFL, NAB’s members are still waiting for the bank to capitalise on its potential. However, despite a management change at its highest levels, NAB needs to significantly restructure its operations before the competition will take it seriously. Weaknesses include its bad commercial property loans over in the UK and underperforming Australian assets (compared to its peers).

Full-time

Despite the possibility of an upset in the 2014 cup, NAB’s structure continued to fall away through the middle of the park and Westpac established an early lead. Its defence held on to give it a 1-0 win. Although it got over the line today, I believe it’s unlikely to take out The Motley Fool’s ASX World Cup trophy because it lacks a growth strategy with firepower and, quite frankly, its shares aren’t cheap.

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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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