Should you buy National Australia Bank Ltd or Australia and New Zealand Banking Group?

With an implicit ‘too-big-to-fail’ government guarantee and reliable fully franked dividend yields, it’s hard not to love our big banks.

Unfortunately the market knows this as well.

Indeed in the current low interest rate environment investors have bought up high yielding stocks and as a result, the big banks do not look cheap at today’s prices.

The worst culprits are Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC), which boast the highest price to tangible book values and lowest dividend yields.

National Australia Bank Ltd. (ASX: NAB) trades on the largest dividend yield, currently 6.4% fully franked, whilst Australia and New Zealand Banking Group (ASX: ANZ) is expected to grow most rapidly throughout the next five years.

Which is the best buy today?

At today’s prices, unfortunately none of the big banks appear very cheap, including NAB and ANZ.

Trailing/historical data will only tell us what has happened in the past so it’s vital investors look to the future before passing judgement on what is, and what isn’t, a worthwhile investment.

Indeed if you assume the banks deserve their rich valuations simply because they have performed strongly in the past, you’re setting your portfolio up for failure.

For example unemployment is rising, net interest margins (NIM) (a key measure of bank profitability) are under pressure and consumer and business confidence is falling. Therefore, I believe the big banks will find it very hard to maintain the same level of cash profit growth in the next three years as they have done in the previous three years.

ANZ derives the greater proportion of its revenues from overseas (currently 24% of the group’s total comes from Asia, the Pacific, Europe and Americas) but even it will not be immune to a slowdown in the domestic economy. Currently shares trade on a tangible price to book value of 2.17.

NAB – our biggest bank by assets – has exposure to the US (through its subsidiary Great Western Bancorp) and to the United Kingdom (through Clydesdale and Yorkshire banks), but these banks are more of a hindrance than anything else. This has resulted in NAB sporting the worst NIM, ROE and efficiency ratio of the four majors. It currently has a price to tangible book value of 1.79.

Better Buy: NAB or ANZ?

As noted earlier, neither bank appears worthy of a buy rating given their current valuations and headwinds in the near term, though if I were to choose one to buy and hold today, it’d be ANZ. But it’s important to remember share market investing is a marathon, not a sprint. So it’s important to be patient and save yourself the risk of losing money by only buying shares which are at a significant discount to their intrinsic value. At today’s prices, I don’t believe any of the banks are at such a level.

Concerned about the sell off in bank shares? Don't miss this

The incredible bull market in bank shares could be ending. Find out all the details you need to know in The Motley Fool's newly updated report, "What Every Bank Shareholder MUST Know". Your copy is FREE when you click here now.

Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. You can follow Owen on Twitter @ASXinvest.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.