Broker ranks Big Bank stocks from best to worse: here's what to buy

This is the time to be switching out of National Australia Bank Ltd. (ASX: NAB) and into Westpac Banking Corp (ASX: WBC), according to one broker. Here's why…

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Westpac Banking Corp (ASX: WBC) is the best performing Big Bank stock this morning while National Australia Bank (ASX: NAB) is the meekest. This gap could widen further according to a leading broker.

Shares in Westpac jumped 1.1% in early trade to $30.75 while NAB has slipped 0.3% to $30.61 following comments from Credit Suisse to switch out of the latter into the former.

This is a complete turnaround for the broker as it used to rank NAB as its top pick among the Big Four and Westpac as its worst.

However, Credit Suisse now expects Westpac to lead the industry in structural productivity initiatives and has upgraded the stock to "outperform" from "neutral" and increased its price target on the bank by a dollar to $35 a share.

In the current low-to-no growth environment, the bank with the most room to cut cost and increase productivity will be the biggest winner and this is how Westpac's new chief executive Brian Hartzer will be making his mark.

Hartzer is expected to undertake a divisional restructure and information technology (IT) platform consolidation is one of the more obvious levers he can pull.

This is why Credit Suisse ranks Westpac its top pick Big Bank stock.

On the other hand, the re-rating of NAB's shares has run its course with the bank's price-earnings discount to the sector closing sharply from around 15% in early 2013 to just 2%.

NAB's successful restructuring is also near completion and that means any additional productivity gains will be relatively limited.

The broker also warns that NAB's ability to sustain its dividend is weaker than its peers and has cut its dividend per share forecast for the bank by 2% to $2.01 a share for 2015-16 and 4% to $2.02 a share for the following year.

Credit Suisse downgraded NAB to "neutral" from "outperform" and cut its target price to $33 a share from $37.50.

NAB is the only Big Bank stock that isn't considered a buy in the broker's book and it favours Australia and New Zealand Banking Group (ASX: ANZ) as its number two choice followed by Commonwealth Bank of Australia (ASX: CBA).

Fair value for ANZ is $31 a share and CBA is $84 a share, according to Credit Suisse.

But I suspect it won't make much difference to performance over a one to two-year period no matter which bank stocks you pick as long as you have at least two of the four in your portfolio. Better yet, spread your investment over the four.

Given the sharp sell-off and what we have heard over the reporting season, I think banks – and financials more broadly – are looking cheap and investors should be going overweight on the sector as I have.

I think resources are also looking good value, but there's far more risk in that sector than financials as the earnings decline has yet to bottom.

Hopefully, there will be light at the end of the resources tunnel late this year or early in 2016.

Motley Fool contributor Brendon Lau owns shares of Commonwealth Bank of Australia, Commonwealth Bank of Australia, National Australia Bank Limited, and Westpac Banking.  Follow me on Twitter - https://twitter.com/brenlau Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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