National Bank of Canada Earnings: Profits Slowing for Now. Expect Expense Growth To Recede in 2024

Narrow-moat National Bank of Canada NA reported OK fiscal third-quarter earnings. As we have been expecting, earnings growth is becoming harder to come by for the sector as pressure plays out for net interest income and balance sheet growth while provisioning has also increased as the current credit cycle develops. In the current quarter, adjusted preprovision operating income was essentially flat year over year, while an increase in provisioning led to a decline in earnings. The bank’s adjusted expenses were up 7% year over year, and we expect this growth rate to moderate in 2024. Indeed, the bank’s FTE count has been declining since the first quarter of 2023. We have seen similar patterns for some peers who arguably over-hired through 2022 and are now switching back to a more intense cost control focus as revenue growth becomes scarcer. This will be a key part of our thesis on the bank as 2024 soon develops.

We still like NBC’s overall positioning among the Canadian banks, with a more conservative mortgage exposure, minimal U.S. exposure, the highest returns on equity among the group, and fewer moving parts or turnaround needs. We are maintaining our fair value of CAD 105 and shares remain roughly fairly valued.

While net interest income, or NII, outcomes have been quite volatile for the bank as the rate environment changes and as puts and takes between nontrading and trading related NII play out, the current quarter shows some signs of stability. NII was down less than 2% sequentially, and the move in trading fees was also more subdued than previous quarters. The bank’s nontrading NII was able to increase in the quarter as the adjusted net interest margin improved, something not all peers have been able to pull off. The bank’s ABA and Credigy segments helped drive some additional balance sheet growth, as the rest of the bank was generally growing at half the rate of these segments.