National Bank: #6 in assets but #2 in EPS growth

National Bank may be the smallest of the big six Canadian banks, but its latest earnings-per-share growth ranks at the top just behind Bank of Montreal.

Thanks to a strong Quebec economy, National Bank (TSX—NA) posted above-average earnings-per-share (EPS) growth in its fiscal second quarter (ended April 30). While the average bank among the big six increased its adjusted EPS by four per cent in the quarter, National’s EPS rose 5.6 per cent.


While the average adjusted EPS among Canada’s Big Six banks rose by four per cent in Q2, National’s EPS rose 5.6 per cent.

The bank’s performance benefited from positive momentum in most of its businesses, disciplined cost management, strong credit quality and solid capital ratios.

National Bank is Canada’s sixth-largest bank by assets and market capitalization. It’s the leading bank in Quebec, but it also has branches in almost every province. It provides integrated financial services to consumers, small and medium-sized enterprises and large corporations in its domestic market while offering specialized services internationally.

One segment bucked the trend

For the three months ended April 30, 2019, National made $581 million, or $1.51 a share, compared with $547 million, or $1.44 a share, in the same period of 2018. The increase was driven by net income growth of nine per cent in the personal and commercial segment, five per cent in the wealth management segment, and 14 per cent in the US specialty and international segment.

But overall results were marred by a 16-per-cent decline at financial markets, which suffered from a slowdown in capital markets activity.

The bank continues to drive down costs through efficiency improvements. Although, mind you, its overall efficiency ratio increased to 55.5 per cent in the latest period from 54.6 per cent in last year’s second quarter (a lower number is better). That’s because the efficiency ratio rose to 44.3 per cent from 40.3 per cent at the financial market segment. But the efficiency ratios at the personal and commercial, and wealth management segments improved.

National’s efficiency ratio improved 308 basis points in 2017 and 2018, and further gains are expected this year and next.

Continuing dividend hikes are likely

Just prior to the release of the second-quarter results, National declared a 4.6-per-cent increase in the quarterly common share dividend to $0.68 a share. The bank has increased the dividend every year since 2010, and further steady hikes are likely in the next three to five years, supported by a reasonable dividend payout ratio in the high 40-per-cent range.

National Bank should earn $6.22 a share in fiscal 2019 (ends October 31). The stock trades around just 10.3 times that estimate. It also yields 4.3 per cent.

National Bank is a buy for growth and income.

This is an edited version of an article that was originally published for subscribers in the July 19, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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