What a brutal year for the Canadian banks. Provisions for credit losses (PCLs) crept higher, exorbitant restructuring costs for Bank of Montreal, rising expenses, net interest margins (NIMs) are getting thin, and short-sellers continue to slam the Canadian banks in the mainstream media.
The latest round of earnings results ranged from unimpressive (like with BMO) to just plain abysmal (CIBC had absolutely horrid numbers).
While it seemed like the sky was falling on Canada’s banking scene, there was a glimmer of hope with one underrated Canadian bank that caught everybody by surprise.
I’m speaking of National Bank of Canada (TSX:NA), Canada’s sixth major banking player with its heavy-weighting in the Quebec market, which is now at a new all-time high at a time when many of its Big Six peers are treading water as we head into the next phase of the credit cycle.
National Bank gets a bad rap for being less geographically diversified than its peers. Sure, it’s a Canadian-centric bank (primarily in Quebec and central Canada) with a less meaningful international growth outlet (just 10% of revenues come from outside the confines of Canada), but what it lacks in diversification, it makes up for with impeccable risk management, as is evidenced by its exceptional results in the fourth quarter.
At a time when the Big Five bans disappointed, National Bank shone.
For the fourth quarter, National Bank posted the best profit growth and stellar ROE numbers of nearly 19%. Revenue increased 7%, and EPS was up double-digits by 11%, making National Bank a king among men for the quarter and likely the year (NA stock is up 28% year-to-date).
The financial markets segment was up 7%, wealth management was up 10%, and PCLs were under control with flat gross impaired loans.
It appears that National Bank has escaped the credit cycle unscathed and is well ahead of its peers in the space thanks to efficiency initiatives and lower exposure to riskier areas such as the bubbly Toronto and Vancouver housing markets.
Prudence is finally paying off for National Bank, and as poorly run banks like CIBC scramble to limit damages amidst macro headwinds, National Bank is finally making a name for itself after years of being in the shadows of its Big Five brothers.
At the time of writing, NA stock trades at 10.7 times next year’s expected earnings and nearly two times book, both of which are considerably higher than that of its historical average multiples.
The stock now commands a well-deserved premium relative to some of its peers in the space, and although the 3.95% dividend yield isn’t as rich as it normally is, I think bank investors finally have a reason to put the underrated number six bank on their radars.
Foolish takeaway
Hats off to CEO Louis Vachon and company for the blowout quarter. National Bank may be overexposed to Quebec, which, while perceived as a negative by investors, proved to be a significant positive for Q4, as Quebec’s economy has been robust at a time when the overall Canadian economy has exhibited signs of weakness.
