- NAB's retail banking operations are improving, notes DJ Carmichael - NAB is gaining retail market share and the stockbroker believes NAB is attractive relative to peers - NAB and WBC outperformed CBA and ANZ, which throws up a question mark about relative valuations

By Chris Shaw and Rudi Filapek-Vandyck

The FNArena database shows a Sentiment Indicator reading for National Australia Bank ((NAB)) of 0.3, which is in-line with that of Westpac ((WBC)) but it trails ANZ Banking Group ((ANZ)) with a 0.6 reading.

DJ Carmichael suggests this reflects a history of strong potential but difficulties in delivering on potential. NAB equal second in terms of Sentiment Indicator reading comes despite the third worst relative share price performance among the major banks since March of 2009 (Westpac has been the prime laggard).

While this likely reflects some caution from investors with respect to business strategy and NAB's long-term prospects, DJ Carmichael takes the view the stock looks attractive at current levels.

The dividend yield of a forecast 6.6% in FY11 stacks up well relative to peers, while DJ Carmichael notes the bank's forward earnings multiple is also relatively low. So too is the price-to-book value at current levels.

What also attracts DJ Carmichael to NAB is banking business volumes continue to grow strongly, which implies solid top-line revenue growth. This supports forecasts for underlying earnings growth before bad debts and tax of 14% in FY11 and 10% in FY12.

DJ Carmichael is forecasting earnings per share (EPS) of 239.9c in FY11 and 269.1c in FY12. This compares with consensus forecasts according to the FNArena database of 240.7c and 264.7c respectively.

NAB's market leading position in business banking is also a positive for group strategy, according to DJ Carmichael. The broker points out CEO Cameron Clyne has shifted management focus to turning around the underperforming retail operations as a complement to the business banking position.

As performance is improving in the retail sector, NAB is enjoying some improved momentum and market share gains, a trend DJ Carmichael expects will continue. Aside from the retail business, other priorities for management include a resolution to NAB's exposure to the UK banking market and an expansion of wealth management operations.

Adding all this up, DJ Carmichael sees enough upside in NAB to rate the stock as a Buy. The FNArena database shows NAB is rated as Buy three times, Hold four times and Sell once. The consensus price target for NAB is $27.10, which implies upside of around 4% from current levels.

Over the past year the stock has traded in a range of $22.23 to $29.03.

FNArena observes both NAB and Westpac shares have outperformed their peers in recent trading sessions. This now leads to the observation that both shares have moved closer to consensus price targets than CBA and ANZ, suggesting the internal dynamic in between the leading banks in Australia has changed. This also suggests relatively more upside potential now resides with CBA and ANZ Bank.

(For more details about banks' share prices and their consensus price targets: see Stock Analysis on the FNArena website).

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