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Kick Off: Commonwealth Bank of Australia v National Australia Bank Ltd.

In their third round match of The Motley Fool’s ASX World Cup, two of Australia’s largest banks in Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank Ltd. (ASX: NAB) will battle it out. Although neither look likely to make it through to the next round, it will be interesting to see which bank makes for the better investment based on today’s prices.

Here’s how the pair line up.

Commonwealth Bank National Australia Bank
ASX:CBA ASX:NAB
Recent Price $81.42 $33.13
Market Capitalisation $132 billion $78 billion
Forecast Dividend Yield 4.8% 6.1%
Projected P/E ratio 15.3 12.5
Price-Book ratio 2.9 1.8
Price Earnings Growth (PEG) ratio 1.72 1.99

Source: Morningstar Research

Commonwealth Bank

Based on the data above, Commonwealth Bank appears to be the more expensive of the two. It trades on a higher P/E ratio and Price-Book ratio while its dividend yield is also significantly lagging behind that of National Australia Bank’s. Further, CBA is hovering just beneath its all-time high price while NAB is still sitting well below its pre-GFC levels.

However, CBA has also been driving on all cylinders. Its heavy exposure to Australia’s recovering housing market has aided it towards a period of record profitability and with interest rates set to remain low for some time yet, those profits could certainly continue to grow.

Unfortunately however, the shares appear to have run their race. They are now considered to be priced for perfection, which may just hinder its performance in the medium-to-long term. Although it looked strong early in the match, the bank struggled with the strong headwinds in the second half and failed to score on the day.

National Australia Bank

While NAB has also delivered fantastic gains in recent years, it remains the only major bank to underperform the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over the last 10 years. And unfortunately, that looks unlikely to change anytime soon…

There is a good reason the bank is trading on a lower P/E ratio and Price-Book ratio than any of its major rivals. Its operations in the UK have proven to be a disastrous investment and have acted as a drag on the remainder of the business. To make matters worse, the bank has also recognised disappointing returns from the local market, when compared to the other three big banks. As such, investors now expect lesser earnings growth from NAB than each of the other big banks.

On the other hand, NAB does possess the highest dividend yield of any of the big four banks. Despite its recent rally, it still boasts a juicy 6.1% dividend yield which was enough to see it score one goal.

Full Time

While both teams looked shaky based on their excessive valuations, NAB managed to edge Commonwealth Bank out of the competition with a 1-0 win thanks to its strong yield. To progress to the next stage of this competition, NAB will be relying on Westpac Banking Corp (ASX: WBC) to lose heavily to Australia and New Zealand Banking Group (ASX: ANZ). Stay tuned on this thread for more ASX World Cup action.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned.

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