I've long considered Commonwealth Bank of Australia (ASX: CBA) to be the standout investment in the banking sector.
But with interest rates rising and economic conditions becoming more challenging, I'm starting to think the competition is getting closer.
One of its biggest rivals is looking increasingly attractive, especially when you consider the difference in their valuations.
So, could it finally take the top spot on my buy list? Here's what I think.
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National Australia Bank Ltd (ASX: NAB)
There are several reasons I think NAB shares deserve serious consideration right now.
The biggest is its position in Australian business banking, where it holds a market share of approximately 22%.
This is an enormous part of NAB's operations. In FY26 half-year results, its Business and Private Banking division accounted for 52% of the group's cash earnings, excluding large notable items.
I think that puts NAB in a strong position to benefit as Australian businesses grow and invest.
And it's already seeing encouraging demand. In its third-quarter update for FY26, NAB reported that Australian business lending increased 2% during the period.
I'm also encouraged by its efforts to simplify operations and improve productivity, which could help turn that lending growth into stronger profits.
Of course, higher interest rates could make conditions more challenging for business borrowers. But I think NAB's established relationships with Australian businesses give it a valuable position in this market.
And what makes the shares even more interesting to me today is their valuation. At approximately $41.17, NAB trades on a PE ratio of approximately 16 times forecast FY28 earnings according to CommSec, with a potential fully franked dividend yield of 4.2%.
I think that's a reasonable price for a major bank with NAB's market position and opportunities to improve profitability.
I'd be happy buying its shares at current levels.
Commonwealth Bank of Australia shares
CBA remains my favourite major bank, although I can understand why investors might be questioning whether its premium valuation is justified.
What keeps me interested is the strength of its underlying business. CBA has spent years investing in technology and making its banking services easier for customers to use.
And I think that investment has helped it build an enviable position in the Australian market.
The bank is the main financial institution for approximately one in three Australians, giving it an enormous customer base and a strong position in deposits and lending.
Its recent financial performance has also been impressive. In FY26, CBA increased cash profit by 7% to approximately $11 billion, demonstrating its ability to keep growing despite a challenging environment.
The difficulty is deciding how much to pay for that success.
At around $165.19, CBA shares trade on approximately 24 times forecast FY28 earnings according to CommSec, with a potential dividend yield of 3.2%.
That's considerably more expensive than NAB shares. And with economic uncertainty and interest rates remaining elevated, I think the valuation leaves less room for disappointment.
Nevertheless, I remain confident in CBA's ability to deliver for shareholders over the longer term.
Foolish takeaway
I think this is becoming a much closer decision than it was previously. NAB offers better value, a higher dividend yield, and opportunities to improve profitability.
In the current environment, I can see a strong argument for choosing it over CBA shares.
But if I had to pick just one, I'd still give CBA the edge. Its competitive position, technology investments, and track record give me slightly more confidence in its long-term prospects.
That said, I would be happy buying either bank today. I think both could be rewarding investments over the coming years.
