Since the start of the January 2013, the National Australia Bank (ASX: NAB) has outperformed its three major banking competitors, rising nearly 26%. As the first chart below shows, the "Big 4" have all outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) over this period, however NAB and Westpac Bank (ASX: WBC) by much more than the other two.
Interestingly, while the NAB still has the highest yield of the majors (the yields are all very tight), it also has the highest price-to-earnings (PE) multiple, which at first glance could suggest the NAB may struggle to continue its outperformance. In reality, things are a lot more complex than this. Banks are incredibly complicated businesses and determining their intrinsic value or even their relative value should be a lot more scientific than simply comparing published PE ratios.
Many investors mistakenly think that when it comes to the four major banks in Australia they are all pretty much the same. As the chart below shows, the 'Big 4' are not all created equally. Careful analysis and stock selection could have led to dramatically better returns over a 10-year holding period, depending on which bank you invested in.
Chart Source: Google Finance
Over the preceding 10 years (excluding dividends), had you invested in the Commonwealth Bank (ASX: CBA), your shares would be up 159%, in Westpac they would be up a still impressive 99%. If you had chosen to purchase shares in the ANZ Bank (ASX: ANZ) you would have underperformed the index with a return of 55%. Worst of all, had you spent the last 10 years owning NAB, you would actually have lost 2% of your money.
Foolish takeaway
Just because a business has done well in the past, it is no guarantee that it will continue to do so in the future. The four banks have all operated in the same environment and on a pretty level playing field but with dramatically differing shareholder returns. Management at two of these banks appear to have done a much better job at creating shareholder value than at the other two. As such management's business acumen (or lack of) certainly should be considered by investors before any future investments in banking stocks.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
