National Bank of Canada (TSX: NA) just hit a new record high. Investors who missed the big rally off the April pullback are wondering if NA stock is still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
Source: Getty Images
National Bank share price
National Bank trades near $146.50 at the time of writing compared to $107 four months ago when the tariff rout sent markets into a steep, but short-lived decline.
In late 2023, the stock was as low as $85. Since then, the trend has been higher due to the Bank of Canada’s interest rate reductions.
Bank stocks sold off in 2022 and 2023 when the central bank aggressively raised interest rates to fight high inflation. This caused concerns that the Bank of Canada would have to drive the economy into a recession to get inflation under control. The feared economic downturn didn’t materialize, however, largely due to high levels of pandemic savings. Inflation fell back to a manageable level, and the Bank of Canada stopped increasing interest rates in 2023. This triggered a rally in the bank sector that picked up steam in the second half of 2024 when the Bank of Canada started to cut interest rates to support the economy.
Aside from the initial shock of the U.S. tariff announcements in April, the market has remained resilient. Tariffs and trade uncertainty are still a concern, but the mood appears to be on the optimistic side, with investors betting that Canada will be able to get a decent deal and that the economy will not tank in the medium term.
National Bank earnings
National Bank delivered solid results for the first half of fiscal 2025. Adjusted net income rose 21% compared to the first half of fiscal 2024. The company finished the fiscal second quarter (Q2) with a common equity tier-one (CET1) ratio of 13.7%. This is well above the amount required by regulators and means National Bank has ample excess capital to ride out some tough times or make more strategic acquisitions. National Bank completed its takeover of Canadian Western Bank (CWB) in early February. The purchase gives Quebec-based National Bank a strong platform in Western Canada to drive its domestic growth strategy.
National Bank raised its dividend by 3.4% when it announced the fiscal Q2 2025 results. Investors who buy the stock at the current level can get a dividend yield of 3.2%.
Risks
Yields on government bonds recently hit new 2025 highs before pulling back from the surge. This is going to put pressure on National Bank and its peers to raise interest rates offered on mortgage renewals. Roughly two million Canadian residential mortgages taken out during the pandemic, when rates were much lower, are coming due in 2025 and 2026. Higher rates will put pressure on households with too much debt. Provisions for credit losses (PCL) at the banks have already moved higher as a result. If tariffs lead to a serious economic downturn in Canada in the next year, the resulting jump in unemployment could trigger a surge of loan defaults. This would be a headwind for Canadian bank stocks.
Roughly 80% of National Bank’s personal and commercial business came from Quebec before the CWB acquisition. Investors will need to keep an eye on Quebec’s economy in the coming year to see how it holds up with some of its largest industries, including aluminum, being targeted by the U.S. administration.
In addition, Quebec is scheduled to hold a provincial election in October 2026. A win by the Parti Québécois would potentially make investors nervous if the PQ, which advocates for Quebec sovereignty, triggers a new independence referendum in the province.
Time to buy?
National Bank’s purchase of CWB provides diversification and a runway for domestic growth. As such, National Bank should perform well over the long run for buy-and-hold investors. That being said, the stock has enjoyed a stellar run. Current investors might want to consider booking some gains to balance the portfolio. Given the potential economic and political headwinds in the next two years, new investors could see a better entry point emerge.
