National Bank of Canada’s Trading and Capital Markets Results Hold Up Well in Q1

Narrow-moat National Bank of Canada NA reported decent fiscal 2023 first-quarter results. Earnings per share came in at CAD 2.56, down 3% year over year primarily because of increases in expenses and provisioning for credit losses. All of the Canadian banks are seeing an increase in expenses, and NBC was fairly average here, while an increase in credit costs from cyclical lows was not unexpected.

Predicting net interest income outcomes continues to be difficult as the rate environment changes and puts and takes between non-trading- and trading-related NII play out. On an adjusted nontrading basis NII increased once again, while on an unadjusted basis NII was down, although this decline 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.

With trading fees coming in strong, fees are likely to exceed our expectations for the year, while being close to in line on expense growth is a welcome development against the current inflationary backdrop. For credit, as with other banks, we are seeing some slight increases in delinquencies, although credit strain is still not even back to prepandemic levels yet.

With results largely fitting in with our previous expectations, we do not expect a material change to our CAD 111 fair value estimate. We often highlight NBC as it does not get as much attention as the Big Five Canadian banks and therefore often presents more opportunity. Heading into this quarter’s earnings, NBC remained one of the more undervalued names among the Canadian banks, and even after this relative outperformance, we still see attractive pricing compared with peers in what we view as an otherwise fairly valued sector.