Shares in National Australia Bank Ltd (ASX: NAB) have continued to fall lower in afternoon trade despite boasting one of the biggest trailing dividend yields in the S&P/ASX20 (INDEXASX: XTL).
What's more, NAB shares trade on the lowest price to book ratio of the big four banks and change hands on a price-earnings ratio of just 13. So why aren't investors scrambling to buy into this seemingly dirt cheap blue chip?
The truth is, there are a number of reasons why NAB trades cheaper than its peers.
Although boasting the biggest loan book of any Australian bank, its assets aren't nearly as profitable as those of its peers. Across a number of important efficiency and profitability measures, NAB lags behind its three rivals. For example, it has the highest cost to income ratio, lowest cash return on equity and net interest margin.
NAB also has to contend with a large portfolio of bad UK commercial property loans and its troubled UK Banking division, which is facing a number of uncertainties moving forward. Notably, a vote on Scottish independence, due in just two days' time (September 18) could have an impact on its subsidiary Clydesdale Bank. In addition, the bank is also facing potential payouts relating to UK regulatory conduct matters.
Buy, Hold, or Sell?
NAB shares have the biggest dividend yield and trade on a low earnings multiple for a number of reasons. I'd rather wait for either a much cheaper share price or a divestment away from the UK before buying. However it's worth noting NAB has taken steps towards greater profitability by announcing an IPO of its U.S. Banking assets and by announcing a partial sale of its bad commercial loan portfolio. So although it's not a buy now, keep it on your watchlist because things can change quickly.
