National Bank Of Canada Q3 2014: Strong Beat Driven By Wholesale

Aug.31.14 | About: National Bank (NTIOF)

Summary

NBF beat Q3 on strength in wealth and wholesale.

Domestic P&C continues to lag and has a moderating outlook given the weak economy in Quebec.

Wealth could continue the current pace of solid earnings growth.

National Bank of Canada (OTCPK:NTIOF) reported a solid Q3 in which adjusted EPS of $1.30 was 9% ahead of consensus, driven by wealth management (+36% y/y) and wholesale (+21%) while Canadian P&C lagged the other segment with +6% y/y growth. Dividend of $0.48 was in-line with expectations, representing a 40% payout ratio.

While wealth and wholesale stood out thanks to lower PCL, the issue with National Bank is that there is limited visibility beyond the current quarter with the soft economic and housing conditions in Quebec, so it is reasonable to assume a moderate growth profile heading into 2015.

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Canadian P&C

Canadian P&C earnings were +6% y/y on the back of a +5% revenue growth, which outpaced the +4% growth in expense and PCL. In my view, Canadian P&C was fairly in-line with stable margin and the earnings growth that outpaced Scotiabank (NYSE:BNS) and Royal Bank (NYSE:RY).

Volume growth looks reasonable with +6% y/y growth of which residential mortgage was +8% y/y and commercial loan +7% y/y. Domestic NIM was flat q/q at 2.27%.

Wholesale

The beat this quarter was mostly due to the strength in the wholesale business with solid pickups in both trading and banking revenue that allowed wholesale to deliver earnings of $187m (+21% y/y). Trading revenue of $192m improved significantly from the $153m in the prior quarter. Specifically, equity-trading revenue was $93m, up from $75m in the prior quarter so this helped the overall trading activities. Underwriting and advisory revenue of $116m was also strong vs. the $85m in Q2.

Wealth management

The addition of TDWIS business helped the wealth management business, which saw +36% y/y earnings growth. Asset growth was again solid with AUA +39% y/y and AUM +23% y/y. Revenue growth of +15% is one of the better ones I saw this earnings season while expense was well maintained at +8% y/y.

Overall, a solid quarter driven by wealth and some from wholesale and I expect wealth to continue to deliver stronger than average earnings. However, it is worth pointing out the weak economies in Quebec could weigh in on the domestic P&C segment with a moderating growth outlook, hence I am fairly neutral on the stock.

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