National Bank: Stock of the Week

The best returns on equity among the Big Six come from a smaller, more 'Canadian' business.

Andrew Willis 6 May, 2024 | 4:49AM
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Key Takeaways for National Bank Stock:

  • National Bank NA is the smallest of the Big Six Canadian banks, but it is almost the most focused and has delivered the best returns on equity.
  • The bank has lost some market share in provinces outside of Québec but it retains a stronghold on the market that will be difficult to break.
  • Despite higher expenses than peers recently, the stock looks slightly overvalued as investors consider the company’s consistent dividend track record and low Uncertainty Rating.


Andrew Willis: Just to be clear, we’re talking about a 37-billion-dollar business when we say National Bank is the smallest of the Big Six, but this Canadian bank punches above its weight.

Equity analyst Michael Miller says National Bank of Canada is a solid, Canadian-focused franchise that often doesn't get as much attention as the ‘big five’. This can lead to opportunities for observant investors…

It is too bad National Bank doesn’t get as much attention from investors as its peers in Canada, because its revenue is 85% Canadian-sourced. The size of the business does come into play here because it has lost market share in provinces outside of Québec over the past decade, but we think it has carved out a nice banking niche in La Belle Province – and that has helped push up the stock.

National Bank Is Smaller but Mightier

While it might not be a bargain to buy National Bank Stock at the moment, it’s worth considering the bank’s dividend track record at around 3-4% yield consistently for the past ten years. Also, the bank’s short interest ratio, which can be a bearish indicator, is around two to four times lower than those of the rest of the Big Six. These attributes may explain why investors haven’t been selling National Bank stock in the face of higher expense growth recently compared to peers. Meanwhile, it has consistently earned the highest returns on tangible equity, which we forecast to be roughly 15% over the medium term.

On the topic of exposure to Canadian housing, which is an important risk to consider among Canadian banks, National Bank has a lower exposure than most peers to the housing market here – though a downturn in the sector would pose a risk to future growth. That said, I’m not sure this bank needs to grow much bigger to be successful.

For Morningstar, I’m Andrew Willis.


bulls National Bank 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.

bears National Bank 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.


The author or authors do not own shares in any securities mentioned in this article.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
National Bank of Canada115.66 CAD0.21Rating

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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