The Canadian Bank That Will Outperform This Year

Strong fourth-quarter results show just how much National Bank of Canada (TSX:NA) is improving.

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With a dividend yield of 3.64%, National Bank of Canada (TSX:NA) is a great place for Canadian investors to turn to for yield and income.

And with the latest quarterly report, the fourth quarter of 2017, we can see the kind of results that will bring strong stock price returns as well.

The results show more evidence that the restructuring program is providing the company with the efficiency gains it is looking for, thus closing the gap between it and the other, more established banks, such as Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM).

Earnings per share came in at $1.39 compared to $0.78 in the same quarter last year for an increase of 78%, as strong revenue growth across all segments combined with reduced operating costs positively impacted results.

In fact, the company’s efficiency ratio improved by 230 basis points, and its ROE was 18.3%. The company’s ROE was 15.5% in 2016, so the improvement is clearly massive.

And with these better than expected results, the bank increased its dividend by $0.02 to $0.60 for a 4% lift.

Importantly, the bank’s common equity tier 1 ratio was much improved compared to last year at 11.2% compared to 10.1%, but it was flat compared to the last quarter.

So, of the large Canadian banks, National Bank continues to have the most upside in terms of efficiency gains in 2018. National Bank is a laggard among the banks and is in the earlier innings of restructuring to improve efficiency.

National Bank is admittedly starting from a much weaker point than many of the other banks, but nevertheless, ROE at National Bank pretty much increased a full 300 basis points in 2017 compared to minor improvements and even slightly down for the other banks.

As a reminder, the bank is targeting $155 million in cost savings in 2018.

On the downside, being heavily weighted in the Quebec region, National Bank provides even less diversity of earnings and revenue than most other banks.

But these latest results compare favourably to both Canadian Imperial Bank of Commerce and Toronto-Dominion Bank (TSX:TD)(NYSE:TD), which reported increases of 25% and 18%, respectively.

Rising interest have helped the results of all banks this year, and looking into 2018, they should continue to do so, and with the risk that rates rise more, this positive effect will be accentuated.

But while the banks are benefitting from increasing interest rates, they will be hurt by the new mortgage rules that come into effect in the new year. The extent of this effect remains to be seen.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Karen Thomas does not own shares of any of the companies listed in this article.

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