About: National Australia Bank Limited is an international banking group which operates in Australia, New Zealand, Europe, Asia and the United States. The Group offers banking services, credit and access card facilities, leasing, housing and general finance, international and investment banking, wealth and funds management, life insurance and custodian, trustee and nominee services.

Why it is in the portfolio: It’s a bank. Banks are by far the largest part of the Australian market and anyone wanting broad exposure to the markets and reasonable dividends is going to have exposure to banks. NAB is the cheapest of the banks as its relatively complex strategy has repeatedly backfired, notably in the US and UK. However, now it is probably the only bank that is not priced for near perfection so there is upside if it gets its act together.

Fundamentals: NAB is currently yielding 7% so doesn’t have to grow earnings much to generate double digit returns, especially after including the benefits of fully franked dividends. If the market regains confident (and values it on the same earnings multiple as the other major banks) there is another 25% upside, which admittedly wouldn’t happen overnight. It is worth mentioning though that despite having been perceived as lower quality than the other large Aussie banks its share price has so far been more resilient in the face of the Haynes Royal Commission which has affected all the banks to differing degrees.

What could go wrong: While NAB has looked relatively accident prone in recent years the primary risk, as with all the Australian banks, is a global credit crisis and/or a domestic recession/housing crisis. That could easily see losses of 50% or more in a short period, whereas the recent operational miss-steps by NAB have tended to result in sharp falls of 10% or so and its lagging of peers over longer periods.