26 February 2010

National Bank Q1 2010 Earnings

Veritas Investment Research, 26 February 2010

On first glance and deeper inspection, it is hard to find too many noteworthy aspects of the National’s solid & steady first quarter. Earnings were in line with Veritas’ expectations, which were themselves slightly above the consensus view. The quarter unfolded pretty much according to script: trading revenues normalized but didn’t melt away, while credit losses increased, but didn’t blow out. The bank’s transition from using standardized credit risk calculations to advanced credit risk models for capital purposes, along with internally-generated capital, resulted in a 180bps increase in the Tier 1 capital ratio. Balance sheet and revenue growth was solid if unspectacular. Having missed expectations slightly last quarter, NA delivered just a bit more this quarter – a bit more than last quarter and a bit more than expectations. But, Veritas thinks the results show that the most likely range for NA’s earnings is in the low- to mid-$6/share range this year and mid- to high-$6/share range next year. The bank’s normalized ROE this quarter was 18%, the Tier 1 ratio is 12.5%, and the dividend payout ratio is 40%. Though lower growth deserves a lower multiple, Veritas continues to recommend shares of NA with a $65 intrinsic value.
Financial Post, 26 February 2010

National Bank of Canada was upgraded from Sector Perform to Outperform by CI Capital Markets analyst Brad Smith after the bank reported better-than-expected first quarter results.

Adjusted cash earnings per share of $1.55 were well ahead of his $1.36 estimate and consensus at $1.45. A 4% revenue shortfall, primarily due to lower trading revenues, was more than offset by an 8% lower-than-anticipated expense run after the $75-million penalty from the bank’s ABCP involvement was excluded.

The bank changed the way it measures risk-weighted assets during the quarter, which meant its Tier 1 capital ratio climbed to 12.5% from 10.7% at the end of the fourth quarter of 2009. Management confirmed that if recently proposed new capital rules are enacted as set out, the preliminary estimate of the impact on Tier 1 would be a reduction of 300 to 400 basis points.

Despite beating his quarterly estimates by a healthy margin, Mr. Smith left his 2010 and 2011 full-year estimates unchanged. He told clients this is due to lingering uncertainty relating to the sustainability of National’s reduced provisioning and expense efficiency levels.

Nonetheless, the upside the analyst sees in the stock justified to upgrade. Mr. Smith’s price target on National Bank shares is $65.