Friday, February 27, 2009

National Bank Q1 2009 Earnings

RBC Capital Markets, 27 February 2009

• We view National Bank's Q1/09 as mildly positive to our view on the stock. Credit performance was better than peers, as expected, and capital ratios were in line with our expectations.

• Operating EPS were stronger than we expected while reported EPS were lower on higher than expected ABCP-related charges.

• We increased our 2009 core cash EPS estimate from $4.77 to $5.00, primarily reflecting the Q1/09 earnings coming in ahead of our estimates.

• National Bank has been one of our favourite bank stocks for the following reasons: (1) the bank is less exposed to U.S. credit than some of its peers; (2) the bank is less exposed to Ontario than most of its peers; (3) the bank's securities portfolio is cleaner than some of its peers, in our view, and the bank has less exposure to off balance sheet commitments (other than ABCP, which has been restructured and we believe will be less impactful to NA shares in the foreseeable future, although exposures do remain).
The Globe and Mail, Tara Perkins, 27 February 2009

Canada's banks are living up to their growing reputation as a safe haven in the midst of the storm that's threatening financial institutions, but their pivotal lending businesses are beginning to stall.

Four of the country's top six banks have disclosed their first-quarter performance, and each churned out a profit during three of the ugliest months in decades.

In comparison, figures released by regulators yesterday show that U.S. banks collectively lost $26.2-billion (U.S.) in their most recent quarter, the first sector-wide loss since 1990.

"Market conditions worldwide for banks remain difficult," Canadian Imperial Bank of Commerce chief executive Gerald McCaughey said yesterday. "Yet, arguably, one of the better places to be right now is in Canada."

The financial results that Canadian banks released this week handily eclipsed analysts' predictions, said Shane Jones of Scotia Cassels Investment Counsel. While the banks face possible losses on their credit portfolios if markets and the economy continue to sour, the banks are strengthening their capital levels to buffer against future hits.

Canadian banks "deserve all the credit they are getting," Mr. Jones said.

But the banks are unlikely to hit the same level of profitability this year as last, as borrowers struggle to pay back debt and growth in the lending business slows down.

"Similar to TD Bank, RBC's Canadian banking earnings have hit a wall, with net income of $660-million [Canadian] down 2 per cent," Credit Suisse analyst Jim Bantis wrote in a note to clients.

The expectation is that the big banks will continue to generate profitability throughout this turmoil, Royal Bank of Canada chief executive Gordon Nixon told reporters after the bank's annual meeting.

He even suggested that dividends are safe. "As long as banks continue to perform at a reasonably strong level, I think dividends will continue to be a real priority," he said.

But while the Canadian industry has distinguished itself during this crisis, "I don't think we want to get smug about that," Mr. Nixon added. "It's not as though we've not had issues."

RBC reported a 15-per-cent drop in profit, to $1.05-billion. It took roughly $1.3-billion in pretax charges relating to the declining value of illiquid securities.

CIBC's problem-plagued U.S. credit portfolios spurred $708-million in writedowns, but the bank still managed to impress analysts with a profit of $147-million.

National Bank of Canada's exposure to asset-backed commercial paper caused its profit to slump from $255-million a year ago to $69-million this quarter.

Many of the banks benefited from unexpectedly high trading revenue.

Despite their issues, Canadian banks are being carried by the muscle of their core lending operations, which are largely dependent on the precarious health of this country's consumers and businesses.

Credit-rating agency DBRS is to release figures today suggesting that average Canadian credit card loss rates increased from 3.75 per cent in July to 4.53 per cent at the end of last year, although that's "in stark contrast to average U.S. prime bank card losses, which reached 6.7 per cent at the end of 2008," said managing director Jerry Marriott.

Banks are signalling they expect to cover more bad debts and are significantly raising their provisions for troubled loans. RBC, for instance, raised provisions for soured loans in its Canadian lending business by 26 per cent because of higher loss rates. CIBC's lending operations posted loan losses of $327-million, up from $189-million a year ago, with bankruptcies and economic pain leading to higher losses in its credit card business.

Now, the challenge for the Canadian banks is to retain their advantage. Executives say many of the factors behind the advantage are long-standing characteristics of the system here, and that other countries will now try to emulate those.

"I think going forward you'll see more and more people move a little bit closer to the way we do residential real estate lending," Mr. Nixon said, adding that Canadian banks keep most mortgages on their balance sheets rather than selling them off, and benefit from strong government-backed mortgage insurance.