TSX Commentary

Veritas Research: National Bank of Canada (NA) – $58.73 – The ABCP Debate Continues …
Buy, Intrinsic Value Estimate: $65.00
Recent market noise, some of which was picked up by the Globe & Mail, has stated that certain tranches of notes restructured under the Montreal Accord are trading at too-optimistic valuations. Whether or not this is true is difficult to tell. The secondary market for Montreal Accord paper is opaque, and transactions are not reported in a transparent manner as, say, equity transactions are. Veritas states that while they are not specialists in the valuation of complex structured paper, they do not endorse the views espoused by the market participants arguing that recent ABCP transaction prices are too high. Based on the available facts, Veritas believes that the likelihood of a material negative hit to NA at this time is relatively low – likely less than 25bps of Tier 1 ratio, which is currently at 10.7%. In a disaster scenario, Veritas believes that the isolated impact of writing off all the bank’s ABCP exposure including both the committed margin facility backing the restructured notes and lending facilities to clients holding restructured notes is worth about 270bps-300bps of Tier 1 ratio. Thus, Veritas maintains its buy recommendation and $65/share intrinsic value estimate on NA.