National Bank of Canada Earnings: Revenue Pressure Emerging, but Mortgage Book Better Positioned

Narrow-moat National Bank of Canada NA, or NBC, reported OK fiscal second-quarter earnings. We are seeing many of the trends we expected for the sector playing out, including pressure on net interest income growth, slowing mortgage loan growth, and pressure on earnings growth. On a total revenue basis, the bank is growing a bit slower than we had projected, which we see being driven by lower NII, while expenses are coming in roughly as expected. 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. As we adjust our revenue forecast slightly lower, we expect our current fair value estimate of CAD 109 to fall by roughly a mid-single-digit percentage.

Earnings per share were CAD 2.23, down 6% year over year, primarily driven by an increase in provisioning for credit losses, while preprovision, pretax earnings were down negative 2%. All the Canadian banks are seeing some pressure on earnings, while increases in credit costs from the cyclical lows of 2022 were not unexpected.

Predicting NII outcomes continues to be difficult as the rate environment changes and as puts and takes between nontrading and trading related to NII play out. On an adjusted, nontrading basis the bank’s NII was up 18% year over year, although down 7% sequentially, while on an unadjusted basis the bank’s NII was down 33% year over year. Paired with this, the year-over-year decline in NII was more than offset by the increase in trading fees, highlighting some of the complexity here. The bank still discloses a positive relationship between higher rates and NII growth, and if rate hikes moderate, we expect funding cost pressure to also moderate while asset yields catch up a bit, while if rate hikes reverse, we would expect trading fees to also reverse a bit.