National Bank: A Strong Buy

Rising earnings estimates on the back of decent second quarter results – including a 5.8% earnings surprise – helped National Bank of Canada (NTIOF) achieve a Zacks #1 Rank (Strong Buy) on September 1. Moreover, the bank has delivered positive earnings surprises in the last four quarters with an average beat of 6.9%.

With a solid year-to-date return of 4.5% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Better than expected second quarter results along with robust capital ratios were the primary rank drivers for this stock.

National Bank reported its second quarter results on August 30, 2012 with earnings per share of $2.00, beating the Zacks Consensus Estimate of $1.89 by 5.8%. Strong results for the quarter were primarily aided by higher top-line and lower operating expenses.

Operating net income (taxable equivalent) came in at C$353 million ($372.70 million), up nearly 5.7% from the prior-year quarter.

Further, total revenue (taxable equivalent) increased 6.5% year over year to C$1.27 billion ($1.24 billion). The increase was mainly driven by higher net interest income and other income.

Operating expenses increased 7.7% from the prior-year quarter to C$744.0 million ($731.65). The hike was driven by higher salaries and benefits, occupancy and technology costs as well as other expenses.

Provisions for credit losses totaled C$40 million ($39.33), down 9.1% from the prior-year quarter.

Assets under administration/management totaled C$225.29 billion, down 7.3% on a year-over-year basis. Average assets came in at C$182.54 billion ($179.51 billion), up 8.3% year over year.

As of July 31, 2012, National Bank's Tier 1 capital ratio (BASEL II) was 12.70% and total capital ratio (BASEL II) was 16.70%. Pro forma Core Tier 1 capital ratio under Basel III stood at 7.8%.

Earnings Estimate Revisions

The Zacks Consensus Estimate for 2012 increased 4.2% to $7.85 per share based over the last 60 days. The current estimate implies a year-over-year growth of 15.4%.

For 2013, the Zacks Consensus Estimate moved up by 4.3% to $8.16 per share over the same time frame.

Valuation

National Bank currently trades at a forward P/E of 9.6x, a 25.5% discount to the peer group average of 12.9x. On a price-to-book basis, the shares are trading at 1.62x, 4.5% premium to the peer group average of 1.55x. Given the company's strong fundamentals, the reasonable valuation is reasonable.

National Bank has a trailing 12-month return on equity (ROE) of 17.8% compared with the peer group average of 14.4%.

About the Company

National Bank is an integrated group headquartered in Montreal. It operates 448 branches in Canada, the United States, Europe, and other international locations. National Bank offers a wide range of banking services, including corporate and investment banking.

It is an active player in international markets and involved in securities brokerage, insurance and wealth management, as well as mutual fund and retirement plan management through its subsidiaries. The company has a market capitalization of roughly $12.193 million. It has about 20,000 employees.

Other Zacks #1 Rank bank stocks include Main Street Capital Corporation (MAIN - Snapshot Report) and Sierra Bancorp (BSRR - Snapshot Report).