EUR 850.00 For Business Accounts Only

Morningstar | Another Steady Quarter for National Bank of Canada

Narrow-moat National Bank of Canada reported strong third-quarter results that fit well with our long-term thesis for the bank. As a result, we are maintaining our fair value estimate of CAD 70 per share. If the bank can maintain anything close to this type of performance, we believe our current fair value estimate is well supported.

Earnings per share growth was again in the double-digits, coming in at 10% year over year. The efficiency ratio improved by 100 basis points, and the return on equity remained above 18%, at 18.5%. This will again likely be the highest return on equity we see among the major Canadian banks this quarter. Rising interest rates have helped the bank expand net interest margins gradually for its Personal and Commercial banking segment, as this metric improved to 2.33% from 2.31% last quarter. The bank saw net income growth within all its primary segments. Average loan volume growth within the P&C unit continued at a modest 5% rate, and growth has remained steady for fee income as well, coming in at 4%. Wealth management has been the stand-out segment in our opinion, with net income up 19% year over year and assets under management/administration up 14% and 16%, respectively. Finally, corporate banking fees within the Financial Markets segment have also shown strong growth, up 20% year over year. Overall, despite the bank’s smaller size and market reach compared with the big five, National Bank of Canada is executing in select areas of the market and finding decent avenues for growth. The economic outlook for Quebec still remains positive, and the province is less exposed to the housing risks of other areas (although a severe housing downturn would undoubtedly affect the whole of Canada).

While the bank has found solid growth opportunities, cost control also remains excellent. Noninterest expenses were up only 4%, and the bank has seen positive operating leverage for all of its primary segments. Credit quality also remained excellent for the bank. Excluding the souring of a single commercial account, there were no discernible signs of any credit deterioration across all loan portfolios. We still believe the long-term story for National Bank of Canada remains positive. The bank often has the highest ROEs, it is charging ahead with double-digit growth, and it has lower real estate exposure to the hottest markets given the bank’s focus on the Quebec area. The average household leverage in Quebec also remains below the Canadian average and well below what we see in British Columbia and Ontario.