Profit from the Resilient Quebec Economy

NA - National Bank

National Bank is a leading financial institution, ranking amongst the six largest commercial banks in Canada. National Bank offers a wide range of banking and financial services, including corporate and investment banking, securities brokerage, insurance, wealth and retirement management. By geography, Quebec is its largest market accounting for 55% of its total revenues. The bank also has an international footprint accounting for 19% of total revenues and other Canadian provinces comprise nearly 25% of total revenues.

National Bank’s business can be divided into – Personal and commercial banking which accounts for nearly 45% of National Bank’s revenue, followed by financial markets (23%), wealth management (23%), and US specialty finance and international (9%). It has over $281 billion in assets as of October 2019. National Bank has an experience of 160 years and is known for providing client-centric integrated financial services and has branches in almost every province of Canada. It is one of Canada’s largest integrated financial service providers, with convenient self-banking channels, 422 branches, 939 banking machines across Canada and a large scale digital presence. In addition, it also has 98 wealth management service outlets across Canada.

Investment Data

Revenue Growth & Market Exposure

National Bank is a Canadian super regional bank with a leading franchise in Quebec. The bank caters to individual customers, small and medium-sized enterprises and large corporations. It offers specialized services in the international markets as well. Over the years, National Bank has earned the trust of its clients to address all of their financial needs. National Bank is the most preferred financial service provider for its clients, especially the SMEs. The bank continues to heavily invest in its platforms to deepen client relationships, combining advisory services and technology to create a more personalized approach.

National Bank is favorably placed to leverage from its leading position in Quebec and increasing market presence across Canada. Its personal and commercial banking has a strong presence in central and other markets in the country, and meets the financial needs of close to 2.7 million individuals and 138,000 businesses. Growth across the P&C segment is driven by strong loan and deposit growth and positive operating leverage. Strong volume growth in both retail and commercial, disciplined cost management, and solid credit performance drove solid performance in the bank’s business.

National Bank’s expertise in specialized markets should also help it expand in the growing commercial markets. The bank’s digital transformation is already bearing fruit, with around 50% of its clients now active on digital channels and more than 92% of core payment transactions being done through mobile and internet banking. Its wealth management business is also firmly established across Canada and is gaining from favorable markets and net inflows. National Bank’s financial markets segment remains strong and it ranked number one in Canada in government debt underwriting, for the sixth consecutive year. In its international segment, National Bank will further consolidate its position in Cambodia and does not intend to expand into other emerging markets during the year. At the end of fiscal 2019, the Bank’s investments in emerging markets totaled $788 million.

National Bank’s investment are directed towards fueling organic growth in its core markets, enhancing client experience and generating positive operating leverage. The bank has an 80% ownership in Credigy (U.S.) and 100% ownership in ABA Bank (Cambodia). Both these investments continue to provide attractive growth potentials with performances exceeding expectations. In 2020, Credigy expects to deliver double-digit earnings growth, driven by a solid pipeline. Positive momentum across all the businesses, disciplined cost management and strong credit quality should continue to drive business growth for National Bank.

Dividends

National Bank has shown a dividend growth of more than 7% CAGR over the last decade and has a reasonable payout ratio of 44% and a current dividend yield of 3.9%. National Bank is a Canadian Dividend Aristocrat with a proven history of attractive dividend yield and consistent annual dividend growth. National Bank has grown its dividend for ten consecutive years. In 2019, the bank raised its dividend by 9%, and bought back 4.5 million shares returning $281 million to its shareholders. The bank plans to resume its share buyback program later in the fiscal year. National Bank has set a medium-term target to achieve a 5%-10% growth in EPS and maintain a payout ratio of 40%-50%. Its credit quality remains strong.

National Bank maintains a CET1 ratio at 11.7% giving it the flexibility to invest in its businesses and return capital to shareholders. The bank delivered on its medium-term objectives and a 7% growth in EPS in FY 2019. It is targeting EPS growth within the medium-term target range for the current fiscal year. It has successfully grown its revenues and income by 7.6% and 9.6% CAGR, respectively, over the last three years. National Bank is focusing on driving growth organically and driving customer satisfaction across all its segments. A strong business environment and economic growth in the U.S. and Canada should drive its top line growth.

Historically low unemployment rates, affordable housing and a strong monetary policy supporting the Quebec economy act as strong tailwinds for National Bank. A leading franchise in Quebec, diversified business mix, and sound balance sheet should support the bank’s dividend growth in the mid to high single-digit range going forward.

Competition

The Canadian personal and commercial banking segment is highly competitive. National Bank competes with other leading Canadian banks like TD Bank, Royal Bank, Bank of Nova Scotia, CIBC and Bank of Montreal. Bank of Montreal is the eighth largest bank in North America by assets, while CIBC caters to 11 million individual, small business, commercial, corporate and institutional clients in Canada, the U.S. and around the world. Scotiabank is a leading international financial services provider with a rich history of 185 years and Bank of Montreal is the eighth largest bank in North America by assets.

TickerCompanySectorIndustryScoreQuoteMarketCapPEFPEEPSYieldPayoutRatioPaymentsDividendChowderAristocratAchieverAmbassadorKingGraph
RYRoyal BankFinancial ServicesBanks6783.8585.709.349.349.005.1548.0044.3211.43YESNONONO1
TDTD BankFinancial ServicesBanks7057.1174.738.828.826.595.5347.9543.1613.80YESNONONO1
BNSScotia BankFinancial ServicesBanks7053.7247.118.038.036.806.7052.9443.6012.20YESNONONO1
BMOBank of MontrealFinancial ServicesBanks6267.1130.607.687.688.766.3248.4044.249.36YESNONONO1
CMCIBCFinancial ServicesBanks7877.5624.826.996.9911.227.5352.0545.8411.87YESNONONO1
NANational BankFinancial ServicesBanks6951.5417.337.927.926.515.5143.6342.8411.66YESNONONO1
CWBCanadian Western BankFinancial ServicesBanks7418.191.585.875.873.116.1636.0141.1211.31YESYESNONO1
FNFirst National Financial CorporationFinancial ServicesBanks6324.421.478.468.462.907.9967.24121.9511.14NONONONO1
LBLaurentian BankFinancial ServicesBanks5230.931.338.698.693.578.6675.0742.6813.57YESYESNONO1
EQBEquitable Group Inc.Financial ServicesBanks6454.320.914.494.4912.102.5811.5741.4010.58YESNONONO1

Bottom Line

Given its strong reputation of a “super-regional Canadian bank”, National Bank should continue to benefit from the resilient Quebec economy. Its growing focus in international markets with a concentration on its two successful subsidiaries should further strengthen the business mix. The bank seems “comfortable with its current positioning” amid macroeconomic and geopolitical uncertainties. National Bank’s leading franchise in Quebec, strong foothold in Canada, and a differentiated positioning of its Wealth Management segment should support future dividend growth.

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DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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