EUR 850.00 For Business Accounts Only

Morningstar | Tougher Capital Markets Environment for National Bank of Canada in 1Q

Narrow-moat National Bank of Canada reported OK fiscal first-quarter results. Not unexpectedly, results were hurt by a more difficult capital and financial markets backdrop. As a result, revenue was essentially flat year over year, as was net income. Diluted earnings per share rose only 3% to CAD 1.50. Capital markets tend to have volatility from time to time, and this does not alter our fundamental view of the bank. The bank maintained expense discipline during the quarter, cushioning some of the decline in revenue, and management maintained overall guidance for positive operating leverage in 2019, even with the difficult start to the year. We were already projecting a deterioration in returns on equity of roughly 200 basis points over the next five years. As such, we are maintaining our fair value estimate of CAD 70 per share.

Credit quality remained steady, as the provision for credit losses ratio remained in the mid-20s, gross impaired loans were roughly flat, and delinquencies were generally flat to down compared with last quarter. The bank continued to increase home equity lines of credit at a steady clip, 6.5% year over year, while mortgages were up roughly 3%. Management expects mortgage growth to pick up even more for the bank as the economy of Quebec remains strong and the housing markets in NBC's primary markets remain more affordable than other parts of Canada. We note that, as is the case with all Canadian peers, the mortgage book is continually shifting to a higher proportion of loans being uninsured. These will all be areas to watch as the housing cycle develops.

The financial markets segment was the only drag on earnings in the quarter, as the other three main segments each increased net income between 7% and 20% year over year. With overall capital markets activity down in the quarter, corporate and investment banking revenue was down. However, global markets revenue (more related to trading activity) was still decent, down only 2%. The personal and commercial banking segment saw growth in net income of 7%, as loan and deposit growth were both strong. Wealth management had a particularly strong quarter from an asset-gathering perspective, especially considering some of the challenges in the markets at the end of 2018. Net income was up 10%, as assets under management were up 7%. We note that all of the revenue growth was due to net interest income; however, given the strong growth in assets, fee income growth should eventually follow. The specialty finance and international segment saw strong growth in ABA-related revenue as the international bank increased the size of its banking network, and loan and deposit balances both grew over 50% year over year.