Beyond the big five with National Bank

Healthy earnings at a discount


CB_National Bank

Canadian investors love their big banks. Look at any balanced mutual fund and you’ll usually find at least a few of the Big Five—TD, RBC, Scotiabank, BMO and CIBC—in its top holdings. Barry Schwartz, though, prefers to put his money in another financial institution: National Bank of Canada.

The company, says Baskin Financial Services’ vice-president, is a steal, trading at around nine times earnings, while its peers trade at around 12. Brad Smith, managing director and head of research at Stonecap Securities, adds that the bank usually trades at an 11% discount to the competition; it’s now about 14% cheaper.

There are some good reasons for the lower valuation. While many of the other banks have diversified outside of Canada, National has no non-Canadian locations, leaving it more exposed to domestic ups and downs. If the housing market does crash, the company could be in trouble, says Smith. As well, about 25% of its revenue comes from its capital market business, which, says Smith, is generally less stable than traditional banking.

However, National Bank has a lot going for it too. Schwartz points out that it’s been reporting some of the best quarterly earnings numbers of all the banks. Its second-quarter adjusted earnings, which hit a record $369 million, came in 5% higher than analyst expectations. It has also hiked its dividend six times in the past three years.

Schwartz likes the strides National has made in wealth management as well. In January 2012, it purchased HSBC’s Canadian investment advisory business, and he thinks the company is eyeing further acquisitions. “They’ve made it clear that they want more high-quality investment counselling firms,” he says.

Smith has a Hold rating on the stock, but thinks its price can climb from $79 today to $84 within 12 months. He says that while the domestic exposure, particularly to the uncertain mortgage market, may give investors pause, it’s a better buy than TD and BMO, which are trying to expand in a still-volatile U.S. market. “Those banks are investing large amounts of capital at subpar potential returns,” he says.

As long as the market stays on an even keel, Schwartz says National is an undervalued operation that’s worth buying. “It’s our largest bank holding,” he says, “and that won’t change.”

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