Thanks to interest rates being stuck at just 2.5% and inflation at 3%, the returns on offer from term deposits and savings accounts are worrisome, to say the least.
That's why many investors are transitioning their money from bank accounts to bank stocks, which offer higher yields and franking credits. It's no wonder the S&P/ASX 200 (INDEXASX: XJO) has climbed over 32% in the past three years.
Of the big four, National Australia Bank Ltd. (ASX: NAB) boasts the biggest dividend yield, currently 8.09% when grossed-up for tax credits. It also trades on the lowest price-earnings multiple (13.4) and price-book ratio (1.90).
So is it too good to be true and why does it trade so cheap?
The reason NAB, our largest bank by assets, is priced so cheaply, can be put down to its overseas exposure. Management teams have come and gone trying to fix the problem and it still faces a number of risks moving forward.
In the near future, the Clydesdale and Yorkshire Banks in the UK are facing a number of uncertainties, including potentially large payouts for misconduct and a Scottish independence vote.
What's more, NAB is still trying to pay down a portfolio of bad UK commercial property loans. Whilst management recently offloaded some of these assets, it still has a long way to go before it'll be able to restore investor confidence.
Buy, Hold, or Sell?
Until NAB can move past the current uncertainties it faces in the UK and pays down more of its bad loan portfolio, the bank will not be worth the risk, in my opinion. In addition slower domestic growth, higher capital requirements and rising bad debts could apply pressure to the bank's profitability and result in lower dividends in the medium term. As such I'll be waiting until I'm offered a much better price before I consider adding NAB shares to my portfolio.
