The Company in a Nutshell
- NA has a slight exposure to the mortgage market, with 70% of its business coming from other segments.
- The bank is pursuing a successful growth by acquisition strategy.
- NA can move faster than the larger banks and is more flexible due to its smaller size.
| Date Reviewed | 02/27/2025 |
| Company Name | National Bank of Canada |
| Symbol | NA.TO |
| Sector | Financials |
| Industry | Banks - Diversified |
| Beta | 1.17 |
| PRO Rating | 5 |
| Dividend Safety | 4 |
Business Model
National Bank of Canada (the Bank) is a Canadian systemically important bank. The Bank operates through four segments: Personal and Commercial Banking, Wealth Management, Financial Markets, and U.S. Specialty Finance and International (USSF&I). Its Personal and Commercial Banking segment includes banking, financing, and investing services offered to individuals, advisors, and businesses, as well as insurance operations. Its Wealth Management segment includes investment solutions, trust services, banking services, lending services, and other wealth management solutions offered through internal and third-party distribution networks. Its Financial Markets segment includes corporate banking and investment banking and financial solutions for large and mid-size corporations, public sector organizations, and others. Its USSF&I segment includes the specialty finance services provided by its subsidiaries, Credigy Ltd. and Advanced Bank of Asia Limited. It also owns the Canadian Western Bank.
| Current price | 118.48 |
| ROE | 17.10 % |
| ROIC | 0.00 % |
| Shareholder Yield | 0.40 % |
| 5-Yr Total Return | 172.40 % |
| 1-Yr Total Return | 9.15 % |
| Next Earnings Date | 05-28-25 |
Latest Quarter Information
What the CEO said:
“The Bank generated strong first quarter financial results, reflecting solid execution across business segments and our diversified earnings power. We were also pleased to recently complete the acquisition of Canadian Western Bank, marking a significant step forward in the acceleration of our domestic growth and toward extending the depth of our banking capabilities to the benefit of all our clients,” said Laurent Ferreira, CEO. “In a context of heightened macroeconomic and geopolitical uncertainty and an evolving credit cycle, we remain committed to maintaining our usual discipline regarding credit, capital and costs,” concluded Mr. Ferreira.
What we say:
2025-02-26, National Bank reported a good quarter with revenue up 17.5% and EPS up 13%. However, Personal & Commercial net income was down 14% due to a significant increase in provisions for credit losses. PCLs across the bank more than doubled, going from $120M to $254M this quarter. The market certainly didn't like that. On the other side, wealth management was up 23% on higher fees while Capital markets was up 35% on strong revenue growth (+40%). U.S. & International did well at +22%, supported by growth at Credigy and ABA bank. NA completed its acquisition of Canadian Western Bank, aiming to accelerate domestic growth and expand its presence in Western Canada.
Investment Thesis
National Bank of Canada is the sixth-largest Canadian bank and the most domestic-focused among the Big Six. With 73% of its revenue coming from Canada, it has built a strong presence in Quebec, but its recent $5B acquisition of Canadian Western Bank is expected to expand its footprint in Western Canada. The deal should create cross-selling opportunities, particularly in private banking services that Canadian Western Bank does not currently offer.
National Bank has been actively diversifying its business, with 50 percent of revenue now generated outside traditional savings and loans. Its expansion in capital markets, wealth management, and international investments, including ABA Bank in Cambodia and Credigy in the United States, provides additional growth avenues.
Playbook
National Bank derives revenue from personal and commercial banking, wealth management, and capital markets. It has a dominant position in Quebec, where it benefits from strong customer loyalty and an extensive banking network. The bank has been expanding aggressively in wealth management through its Private Banking 1859 brand, as well as in capital markets, where it is a leading player in ETF market-making and debt underwriting in Canada.
Growth Vectors
A major growth driver for National Bank is its acquisition of Canadian Western Bank, which will significantly increase its market share beyond Quebec. The bank is also expanding into emerging markets, particularly Cambodia, through ABA Bank, which has been steadily growing its loan book and customer base. Capital markets and alternative lending, particularly through Credigy in the United States, also provide high-margin growth opportunities.
Economic Moat
National Bank holds a narrow economic moat due to its strong brand recognition, cost advantages, and customer switching costs in Quebec. It benefits from Canada's highly regulated banking industry, which ensures stability and limits competition. However, its smaller scale compared to the largest Canadian banks means it lacks some cost efficiencies and global diversification. The acquisition of Canadian Western Bank could strengthen its competitive position, but there are execution risks involved.
Dividend Triangle
| 5-Yr Rev. Growth | 9.35 % |
| 5-Yr EPS Growth | 11.00 % |
| 5-Yr Div Growth | 10.20 % |
Potential Risks
While National Bank has demonstrated strong performance, it is exposed to several risks.
Business Vulnerabilities
National Bank remains heavily reliant on Quebec, with about 50 percent of its revenue coming from the province. Any economic slowdown in the region could impact its performance more than its larger competitors, which have greater geographic diversification. The bank also takes higher risks to achieve growth, particularly through its investments in Cambodia and alternative lending markets in the United States, both of which can be unpredictable.
Industry & Market Threats
One of the primary concerns is the increase in credit provisions, which have been rising due to higher impaired loans, particularly at ABA Bank. The broader economic slowdown and high interest rates could further strain the bank’s loan portfolio. Additionally, revenue from financial markets remains volatile, meaning that a bearish stock market could result in weaker quarterly earnings.
Competitive Landscape
National Bank competes with larger institutions such as Royal Bank of Canada, Toronto-Dominion, and Bank of Montreal, all of which have stronger capital positions and global reach. However, it has outperformed the Big Five banks over the past decade due to its flexible and proactive approach to capital markets and wealth management. The expansion into Western Canada through Canadian Western Bank will provide some diversification, but the bank still lacks the scale of its largest peers.
| Debt/Equity | 2.00 |
| Financial Debt to EBITDA (TTM) | 5.60 |
| Current Ratio (Quarterly) | 0.00 |
| Credit Score | 70 |
Dividend Growth Perspective
The bank has been one of the most generous over the past 5 years, which is impressive considering the company had to take a break in its increases between 2008 and 2010 due to the financial crisis. It did the same in 2020-2021, waiting for regulations to lift. This finally happened at the end of 2021, and the bank rewarded shareholders’ patience with a dividend increase of 23% (to $0.87/share). They have since returned to the traditional biannual dividend increase. In Q2 of 2023, NA increased its dividend by 5.2%. We expected a similar increase for Q4 and were not disappointed with a 4% increase (from $1.02/share to $1.06/share). The bank offered another dividend increase in Q2 of 2024 of 4% (now paying $1.10/share) and ended the year with another increase of 3.6%. NA exhibits one of the lowest payout ratios and the highest dividend growth rate among its peers.
| Dividend ($) | 4.56 |
| Dividend Yield Fwd | 3.90 % |
| Dividend Frequency | Quarterly |
| Average 5-Yr Yield | 3.90 % |
| Payout Ratio (%) | 40.10 |
| Cash Payout Ratio (%) | 62.95 |
| DGR 1-Yr | 7.55 |
| DGR 3-Yr | 15.00 |
| DGR 5-Yr | 10.20 |
| DGR Streak | 15 |
| Chowder Score | 14.05 |
| Next DVD PMT | 05-01-25 |
Valuation
| Recent Annual Dividend Payment | $ 4.56 |
| Expected Dividend Growth Rate Years 1-10 | 5.00% |
| Expected Terminal Dividend Growth Rate | 6.00% |
| Discount Rate | 10.00% |
| Discount Rate (Horizontal) | |||
| Margin of Safety | 9.00% | 10.00% | 11.00% |
| 20% Premium | $ 177.84 | $ 133.81 | $ 107.37 |
| 10% Premium | $ 163.02 | $ 122.66 | $ 98.43 |
| Intrinsic Value | $ 148.20 | $ 111.51 | $ 89.48 |
| 10% Discount | $ 133.38 | $ 100.36 | $ 80.53 |
| 20% Discount | $ 118.56 | $ 89.21 | $ 71.58 |
Video Tutorial: How to Read the Stock Cards DDM Valuation
| Market Cap | 46 B |
| PE Ratio | 10.80 |
| Fwd PE | 10.65 |
| Price to Book Ratio | 1.50 |
| DDM Valuation | 111.51 |
| Average 5-Yr PE | 11.24 |
| Value Score | 77 |