National Australia Bank Ltd (ASX: NAB) shares and Commonwealth Bank of Australia (ASX: CBA) shares are two of the most popular investments. But which one is better?
ASX bank shares are known for paying large dividends, but there's more to the investment consideration when it comes to banks than just the dividend income.
There are other things to compare like the price/earnings (P/E) ratio, loan arrears and so on.
CBA may be a much bigger business than NAB, but let's look at some of those different factors.
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P/E ratio comparison
One of the easiest metrics, and perhaps one of the most important, to compare businesses is looking at the multiple of earnings. The higher the metric, the more expensive the current share price. It could suggest that a business is expected to deliver a high level of growth in the coming years, such as ASX tech shares.
But, if two businesses within the same industry are substantially differently valued, it could suggest that one is a lot better value than the other.
Let's compare the two by using the forward profit projections for FY23 on Commsec.
The NAB share price is valued at 12 times FY23's estimated earnings. The CBA share price is valued at 17 times FY23's estimated earnings.
On an earnings multiple basis, CBA shares appear to be substantially more expensive than NAB shares.
Dividend yield
Dividend returns aren't everything, but with banks they make up a large part of the return over time.
Dividends can be cut as we saw during the COVID-19 hit year of FY20.
With conditions 'normalising' after COVID-19, bank dividends are returning to bigger payouts. Indeed, higher interest rates could actually help the ASX bank shares earn larger profits and therefore afford bigger shareholder payouts.
According to Commsec data, CBA shares could pay a grossed-up dividend yield of 6% in FY23 and NAB shares could pay a grossed-up dividend yield of 8%.
Perhaps unsurprisingly, the CBA yield is lower than NAB's yield at roughly the same ratio as CBA shares trade at a higher valuation than NAB shares.
Loan arrears
With interest rates going up so much, it will be interesting to see how the bank's loan books perform.
If borrowers get into difficulties making repayments, this could lead to higher home loan arrears and then higher bad debts. This could prove troublesome at a time when house prices are falling.
In the CBA quarterly update for the three months to September 2022, its home loan arrears over 90 days overdue were just 0.46% of the loan book, down from 0.58% at 30 September 2021.
For NAB, its housing lending arrears that were over 90 days overdue was 0.73% at 30 September 2022, down from 1.24% in September 2021.
On this measure, CBA's loan book seems to be performing better at the moment.
Conclusion
NAB shares look like they're better value to me. I think the leadership team, headed by Ross McEwan, have done a good job at transforming the bank and it seems well-placed to get through the next period.
