JP Morgan has downgraded National Australia Bank to "underweight", citing the steady decline in its net interest margin relative to the other big banks.According to a report issued yesterday, NAB's margin was 20 basis points above the average margin of the other three banks in 2007, whereas today it is 20 bps below its rivals.The report said: "Our work suggests that the largest driver of NAB's differential, relative to peers, is business mix."JP Morgan said the bank needed to make a number of changes to its business to improve the situation. Top of the list is to sell its UK commercial real estate book.Other items on the to-do list include increasing share in personal lending, continuing to increase mortgage market share, selling Clydesdale Bank in the UK, and re-pricing business lending in New Zealand.JP Morgan said: "While Australian banks typically only have abut five per cent of their lending balance sheet directed towards personal lending, yields on this product, at around 15 per cent, are materially higher than standard variable rates for mortgages."NAB's market share in personal lending has been consistently declining since 2010 - down from a 20 per cent market share to the current level of about 17 per cent."NAB's growth in mortgage market share in recent years has helped improve its margin but JP Morgan questioned whether it could continue to grow share, with "peers now operating at stronger rates of growth" and an improved funding environment putting non-bank lenders on a more competitive footing.JP Morgan said: "Given recent improvements in valuations for UK commercial real estate, rolling off NAB's non-core book may represent the easiest fix."Other strategies to improved risk-adjusted margins will take significantly more time."JP Morgan also looked at the impact on NAB's margin of its high level of liquid holdings. According to the report, NAB holds liquidity equivalent to 35 per cent of its loan book, compared with 25 per cent for ANZ and much lower levels for Commonwealth Bank and Westpac.It said NAB holds a much smaller proportion of its regulatory liquidity in self-securitised holdings. Carrying more self-securitised RMBS would have a superior margin outcome.