Shares in National Australia Bank Ltd (ASX: NAB) were trading higher today, as the S&P/ASX200 Index (INDEXASX: XJO) followed the US markets lead on Friday.
However NAB's share price has mostly drifted sideways in 2014, despite offering the best dividend yield of the big banks and trading on the lowest multiples across a number of common valuation metrics, such as price to book and price to earnings.
So why is NAB trading so cheap and is this your opportunity to pick up shares at a discount?
The reason why NAB has underperformed its peers can be put down to the bank's exposure in the UK. This includes two banking subsidiaries, namely Clydesdale Bank and Yorkshire Bank, and a "run-off" portfolio of bad commercial property loans, which were, in 2012, integrated into the main bank.
Although NAB recently divested $1.13 billion (GPB 625 million) of the portfolio to a US private equity fund, I'd like to see more of the same before buying any shares.
Closer to home, the bank also lacks the profitability of its peers, such as Australia and New Zealand Banking Group (ASX: ANZ), which achieved a net interest margin of 2.48% in the 2014 half year, versus NAB's 1.63%.
There will come a time (or price) to buy NAB shares but it is not now. I'd consider buying the bank (taking into account its profitability and dividend yield) when it reaches a price-to-book ratio (P/B) at, or below, one. If you think that sounds like a pipe dream consider this: In the depths of the GFC (2009), NAB traded on a P/B ratio of 1.05 and paid a fully franked dividend yield of 8.6%.
