Is National Australia Bank Ltd a sell?

National Australia Bank Ltd. (ASX: NAB) is our largest bank by assets and fourth largest by market capitalisation. However, it is probably the least liked by Australian investors as evidenced by its relatively cheap valuation.

Compared to its major bank peers, such as a Westpac Banking Corp (ASX: WBC) and Commonwealth Bank of Australia (ASX: CBA), it has the smallest net interest margin, worst return on equity and largest cost to income ratio. However, it does have the greatest dividend yield of Australia’s big four banks, currently 5.6% fully franked.

The problem for NAB (and therefore its shareholders) is the bank’s disastrous UK exposure, where it operates under the names of Clydesdale Bank and Yorkshire Bank. These banks have been, and continue to be, a burden on NAB’s management and earnings potential.

Despite recently selling down around $1 billion of its bad UK commercial property portfolio and announcing an initial public offering (IPO) of its U.S. banking subsidiary just last week, it has many more hurdles to leap before it becomes a standout buy.

For example, it’s also facing the prospect of an independent Scotland coupled with a swarm of misconduct claims in the UK, these two risks could result in significant costs for the bank in the short term.

Is it time to sell?

I don’t know what will happen in the UK over the coming year but I do know there are other cheap stocks inside and out of the S&P/ASX 200 (INDEXASX: XJO), which have better growth prospects and dividends just as good as NAB.

For example, our top analyst, Scott Phillips, recently identified one cheap but growing ASX stock with a 6.7% grossed-up dividend yield which I think is a STANDOUT buy today. If you're interested in knowing its name, just click on the link below, enter your email address and we'll send you the FREE report on his top dividend stock idea for 2014 - 2015! It's free.

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Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the companies mentioned in this article. 

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