National Australia Bank Ltd (ASX: NAB) shares could be a great place to look for bank share opportunities. Owners of Commonwealth Bank of Australia (ASX: CBA) shares may want to know why another bank could be a strong idea.
Businesses are all different sizes. But, it's important to keep in mind that it's the return on our own money that is the most important metric. A 10% return from company A is better for our portfolio than an 8% return from company B, even if company B is twice the size of company A.
Over 2022 to date, the S&P/ASX 200 Index (ASX: XJO) has dropped by 12%. The CBA share price has only declined by 8%. The NAB share price is flat in 2022, meaning that it has significantly outperformed.
One expert thinks that NAB could still be a great pick to buy now, as reported by my colleague Tony Yoo.
NAB shares are a leading idea alongside CBA
Shaw and Partners portfolio manager James Gerrish, talking on a Market Matters Q&A, pointed out that NAB is smaller than CBA, but it's also a commercial and business-focused bank.
Gerrish said, according to Yoo:
[NAB] has been the big improver in recent years and we have identified NAB as our number two pick in the sector, while viewing it as complementary to a holding in CBA.
But on CBA, the expert said:
CBA…is a housing-focussed bank. The best in the sector by a large margin, and our go to.
It's the most expensive, however, the returns they have achieved over time mean that its place at the top of the tree is well justified.
They have the best technology and capital efficiency and these are important.
[It's] a core holding that we up weight/down weight but rarely sell.
Which one is better?
In 2022 to date, NAB has been the better bank to own.
Despite its outperformance, NAB shares still look better value to me.
For starters, its price-to-earnings (P/E) ratio is lower, and the potential dividend yield is bigger.
According to CommSec numbers – which are provided by third parties, not from the bank's team – CBA is expected to generate $5.58 of earnings per share (EPS), which puts the CBA share price at 17x FY23's estimated earnings.
CBA could pay an annual dividend per share of $4.19, which translates into a projected grossed-up dividend yield of 6.4%.
Let's compare that to NAB. CommSec numbers suggest that NAB shares could generate $2.39 of EPS, putting it at 12x FY23's estimated earnings. In FY23, the projection for the annual dividend is $1.63. This puts the potential forward grossed-up dividend yield at 7.9%.
Assuming both businesses were to produce similar profit growth in the next 12 months, NAB's growth would come at a cheaper price, and the yield is better.
I think both banks are worthwhile long-term investments, though they wouldn't be top of my wishlist.
It will be interesting to see how these two banks, which are currently seen as higher quality compared to their peers, perform during this period of rising interest rates. The performance of their loan books could be key if borrowers get into trouble.
