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Key Takeaways on National Bank Stock
- National Bank is the sixth largest bank in Canada
- The Bank has a stronghold in Quebec
- National Bank stock is trading at a discount to our fair value estimate
Ruth Saldanha: National Bank of Canada (NA) is the sixth-largest Canadian bank, and it, along with its 5 larger peers, collectively holds almost 90% of the nation's banking deposits. National Bank of Canada is the most Canadian-focused of the Big Six, with roughly 85% of its revenue derived from Canada. It has also has the most concentrated branch network in Canada among the Big Six, primarily located in Quebec.
National Bank has a Stronghold in Quebec
Because it operates almost entirely within the favorable Canadian banking environment, National Bank of Canada has consistently earned the highest returns on tangible equity among its peers. Morningstar analyst Eric Compton likes its lower exposure to the hottest housing markets compared with competitors. While it is smaller than its peers and the bank can run into stiff competition, he believes that the bank's unique stronghold in Quebec will be difficult to break.
After updating our projections with the latest quarterly results, Compton decreased his fair value estimate to $105 per share. The bank’s expense growth has recently been higher than peers, and for 2023 Compton expects the bank to fall back in line with the overall industry.
Overall, National Bank of Canada is a solid, Canadian-focused franchise with the best returns on equity of the Big Six, but it often doesn't get as much attention as the "big five," which can lead to opportunities for investors. It is currently trading at a slight discount to our fair value estimate.
For Morningstar, I’m Ruth Saldanha.
National Bank Stock Bulls Say
- National Bank of Canada is the most Canadian-focused of the Big Six, and therefore its returns are the least diluted through doing business in banking markets that are less attractive than Canada.
- National Bank of Canada has one of the lowest overall exposures to the hottest housing markets in Canada, namely Vancouver and Toronto.
- National Bank of Canada is heavily weighted toward Quebec and central Canada, whose economy is one of the stronger ones in Canada, helping support better relative performance for the bank.
National Bank Stock Bears Say
- National Bank of Canada lacks some of the scale and distributional advantages of the largest Canadian banks, and can also lack some of the growth prospects of the larger banks because its markets can be more limited.
- National Bank of Canada has had higher expense growth compared with peers. With wage inflation heating up, this could hurt NBC even more than peers if revenue growth ever slows.
- Higher interest rates and rising amortization periods for mortgages show the Canadian consumer is set to come under increased strain for the foreseeable future, increasing risk.
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