The banking sector’s latest earnings season starts today, as Bank of Nova Scotia and Bank of Montreal announce their Q1 results this morning. The overall banking sector has suffered during the COVID-19 phase due to higher provisions for credit losses. However, some Canadian banks, like National Bank of Canada (TSX:NA), are continuing to pleasantly surprise investors, despite the pandemic-related headwinds.
National Bank of Canada will report its Q1 of fiscal 2021 results on Wednesday. Let’s explore its recent earnings trend and analysts’ expectations from its Q1 results. Then we’ll discuss why it could be the best bank stock to buy in 2021.
National Bank of Canada’s earnings trend
Despite the challenging macroeconomic and business environment last year, National Bank of Canada’s revenue continued to grow positively in the last year. In fiscal 2020, the Montreal-based bank registered a 7% rise in its adjusted revenue to $8.2 billion. Its stronger net interest income from financial markets and personal and commercial banking segments drove its revenue higher. NBC’s net interest income from financial markets more than doubled with a solid 109% YoY (year-over-year) rise in fiscal 2020. It registered 2.6% positive growth in its personal and commercial banking net interest income.
National Bank of Canada’s provisions for credit losses in personal and commercial banking suddenly rose above $300 million in the second quarter of fiscal 2020. However, it reduced to just $67 million by Q4. Despite sequentially improving trends, the pandemic-driven higher credit risks were the key factor hurting its overall earnings last year.
Comparing with peers
In Q4, National Bank of Canada reported adjusted net earnings of $1.69 per share without any YoY change, but 11.4% better than analysts’ consensus estimates. It was the sixth consecutive quarter when the bank beat analysts’ earnings estimates. None of the large Canadian banks, like Royal Bank of Canada, Bank of Nova Scotia, and Bank of Montreal have managed to do so.
National Bank of Canada’s adjusted net income rose by 1.3% to $2.2 billion in fiscal 2020. RBC — the largest Canadian bank — reported 11.2% drop in its bottom line during the same period. Similarly, Bank of Nova Scotia and Bank of Montreal posted massive 25.3% and 18% decline in their last fiscal year earnings, respectively.
Q1 earnings expectations
According to analysts’ latest consensus estimates, National Bank of Canada could report its first positive YoY earnings growth in four quarters on Wednesday. Its first-quarter earnings are estimated to be around $1.71 per share. A consistent decline in its provisions for credit losses and rising net interest income could favour the bank’s first-quarter results. By comparison, RBC, Bank of Nova Scotia, and Bank of Montreal are expected to continue reporting a YoY drop in their earnings in Q1 2021.
Despite its much better financial growth, National Bank of Canada stock has underperformed its peers lately. In the last six months, NBC stock has risen by 12.8%. During the same period, the shares of RBC, Bank of Nova Scotia, and Bank of Montreal have risen by 13.4%, 29.8%, and 34.9%, respectively. I expect NBC stock to outperform all other bank stocks in 2021 due to its faster-than-expected financial recovery and strong net interest income growth trend.