There are a few reasons National Australia Bank Ltd (ASX: NAB) shares might look more tempting than Commonwealth Bank of Australia (ASX: CBA) shares, but I’d be buying CBA shares first.
CBA and NAB are two of the ‘Big Four’ Australian banks, along with Australia and New Zealand Banking Group (ASX: ANZ) and Westpac Banking Corp (ASX: WBC). CBA has 14.1 million Australian customers and a 24% share of the mortgage market, while NAB is Australia’s largest lender to businesses.
Why NAB Shares Might Look Better
There are a couple of reasons why NAB shares might look more appealing on the surface. First of all, the dividend yield on NAB shares is 8.02%, compared to 6.02% on CBA shares.
Second, the P/E ratio of NAB is 12.27x compared to the CBA P/E ratio of 13.96x. If you’re not familiar with P/E ratios, check out this tutorial and video.
These indicators may lead an investor to think that NAB shares provide better value than CBA shares. I think there are a few more factors to consider.
Why I Think CBA Shares Are Stronger
While all four of the big banks are strong competitors, I think CBA has a competitive advantage over the other three. CBA has the largest customer base by some margin, with 14.1 million Australian customers and almost a quarter of the mortgage market.
CBA has also been able to continue growing interest and income despite shrinking profit margins; something that the other banks have struggled to do.
A recent Rask Media article considered NAB’s financial outlook and noted that they are losing market share in the Australian mortgage market, with their share falling from 8.5% to just 4% with customers refinancing.
Mortgages are especially important to banks because of the length of the contracts. Losing market share now could impact NAB for many years to come.
CBA also recently announced that they have a secret plan to cut $2 billion in expenses, which could pay off in the long run, but…
I Wouldn’t Buy Either Bank Right Now
Although I would buy CBA shares first, I’m not jumping at the chance to buy either. I think the best way to get exposure to the banks is to buy a diversified and low-cost ETF, like the BetaShares ASX200 ETF (ASX: A200). The banks make up a large portion of the ASX200 market cap so if you’re investing in an ETF, you probably already have a decent exposure to them.
It’s also possible that you have large exposure to the banks through your superannuation, money that investors often forget about. Personally, I’d rather invest in one of the three companies mentioned in the free report below to diversify away from bank shares.
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
