TSX Commentary

National Bank (NA) – $59.73 – Q1/F10 Summary
Buy, Intrinsic Value Estimate: $65.00
Veritas states that both on first glance and deeper inspection, it is hard to find too many noteworthy aspects of the National’s solid, steady first quarter. Earnings were in line with Veritas’s expectations, which were themselves slightly above the consensus view. The quarter unfolded pretty much according to script: trading revenues normalized but didn’t melt away, while credit losses increased but didn’t blow out. The bank’s transition from using standardized credit risk calculations to advanced credit risk models for capital purposes, along with internally-generated capital, resulted in a 180bps increase in the Tier 1 capital ratio. Balance sheet and revenue growth was solid if unspectacular. Having missed expectations slightly last quarter, NA delivered just a bit more this quarter – a bit more than last quarter and a bit more than expectations. But, Veritas thinks the results show that the most likely range for NA’s earnings is in the low- to mid-$6/share range this year and mid- to high-$6/share range next year. The bank’s normalized ROE this quarter was 18%, the Tier 1 ratio is 12.5%, and the dividend payout ratio is 40%. Though lower growth deserves a lower multiple, Veritas continues to recommend shares of NA with a $65 intrinsic value.