Since the turn of the year investment bank Macquarie Group Ltd (ASX: MQG) has delivered truly stunning share price performance. In fact, it is up 41% year-to-date, which is considerably higher than the ASX's return of 5% and even more impressive than National Australia Bank Ltd.'s (ASX: NAB) capital gains of 2.5%. However, looking ahead, I believe that the tables will turn and that NAB is a better buy than Macquarie. Here's why.
Growth Potential
With interest rates on the slide, it is likely that both companies will receive a boost to their bottom lines. In the case of NAB, this is likely to come in the form of increasing demand for loans, as well as fewer defaults and asset writedowns as the cost of servicing existing loans falls. For Macquarie, a declining interest rate is likely to have a positive impact on the level of the ASX and, with a proportion of its revenue coming from asset management fees, higher valuations mean higher fees.
However, NAB is expected to post much stronger earnings growth numbers over the next two years, with its bottom line set to rise at an annualised rate of 12.4% versus 7.8% for Macquarie. Looking further ahead, NAB's decision to divest its UK and US operations should allow it to generate efficiencies and have a positive impact on its bottom line over the medium term.
Valuation
Despite its excellent growth prospects, NAB trades on a price to earnings (P/E) ratio of just 13.6. That's lower than the ASX's P/E ratio of 16.5 and is also below Macquarie's P/E ratio of 16.7. Moreover, when the two companies' forecast growth rates are combined with their respective ratings, NAB has a price to earnings growth (PEG) ratio of just 1.1, while Macquarie's is much higher at 2.15. As such, it appears as though NAB offers far superior growth at a more appealing price than its finance peer.
Income Prospects
It's a similar story when it comes to dividends, with NAB currently having a fully franked yield of 5.7% versus 4% for Macquarie. And, while Macquarie is expected to increase dividends per share at an annualised rate of 8.7% during the next two years (versus 0.8% per annum for NAB), its yield is still set to lag that of NAB over the medium term. Furthermore, NAB's dividends appear sustainable and have scope to rise, with it having a dividend coverage ratio of 1.4 in the current year.
Looking Ahead
So, while Macquarie has been the star performer of the two companies thus far in 2015, it appears to be fully valued. As such, NAB, with its superior forecasts, yield and valuation, could prove to be the better long-term buy – especially with a new strategy having the potential to dramatically improve investor sentiment.
