Monday, April 30, 2007

RBC CM Initiates Coverage of National Bank at Underperform

RBC Capital Markets, 30 April 2007


We are initiating coverage of National Bank of Canada with an Underperform, Average Risk rating on its shares.

Investment Opinion

• National Bank trades at a 1.5x P/E discount to the group, in line with its average of the last five years, and we do not believe the discount will narrow in the coming year as EPS growth should lag the group.

• National Bank's current provisioning rate is more at risk of rising than other banks' in our view, retail loan growth has slowed in Quebec due to increased competition, and the company's successful partnership programs with wealth management firms are not yet large enough to offset slower growth in the bank's base market. Securities gains were also abnormally high in 2006. Lastly, the new CEO is replacing one who was very well perceived by the Street, which may cause some unjustified unease among some investors.

• Valuation. Our 12-month price target of $65 is a combination of our sum of the parts and price to book methodologies. It implies a multiple of 11.2x 2008E cash EPS, compared to the current 11.4x multiple on 2007E earnings and a 5-year average forward multiple of 11.3x. Our P/B target of 2.3x in 12 months is at the low end of our target for banks given a lower ROE and a higher risk premium, based on more exposure to deteriorating credit quality. Our sum of the parts target of 11.4x 2008E earnings is below our target industry average of 12.6x, reflecting higher exposure to low-multiple wholesale businesses and slow revenue growth in retail banking.