CA - National Bank of Canada: Net Interest Income Remains Under Pressure

2023-04-19 23:41:21 ET

Summary

• National Bank of Canada saw a fall in net interest income from that of the previous year, despite growth across the Personal and Commercial Banking segment.
• Additionally, while non-interest income across the Financial Markets segment has grown, Global Markets has been coming under pressure.
• I do not take a bullish view on National Bank of Canada at this time.

Investment Thesis: I do not take a bullish view on National Bank of Canada ( NTIOF ) at this time owing to pressure on net interest income and global markets.

In a previous article back in December, I made the argument that National Bank of Canada may see modest growth in the short to medium-term, owing to the risk that net interest income growth and financial markets activity could be vulnerable in a potential recession.

Since December, the stock has seen modest growth of just under 4%.

The purpose of this article is to assess National Bank of Canada's performance following my previous assertions, and whether the stock could see upside going forward.

Performance

When looking at quarterly results for the quarter ended January 2023 - we see that net interest income is down slightly on that of the same quarter last year.

It is also notable that the Personal and Commercial segment accounted for 75% of total net interest income for the period.

To gain a broader perspective on historical performance (both net and non-interest income less expenses) across the Personal and Commercial segment - here is a heatmap of overall net income for the Personal and Commercial segment from Q1 2020 to the present:

We can see that after a significant recovery in the latter half of 2021 - net income levels have remained relatively consistent - from 310 to over 350 million Canadian dollars per quarter.

Net income from Q1 2022 to Q1 2023 was up by just over 4%.

However, we can see that non-interest income came in higher than that of net interest income - with the Financial Markets segment accounting for almost half of non-interest income for Q1 2023.

Additionally, it is notable that non-interest income has surpassed that of net interest income. This has not been the case for the previous five quarters - with net interest income having been larger than non-interest income. While non-interest income for financial markets saw significant growth from 420 million CAD in the previous quarter to 728 million CAD for Q1 2023 - this was partially offset by a loss of 168 million CAD in net interest income - down from that of 49 million CAD in the previous quarter.

More broadly, the bank saw a decline in first-quarter profit as a result of having to set aside a larger portion of funds to deal with economic uncertainty - which outweighed the gains from higher interest rates.

Moreover, after a strong performance across Global Markets in Q1 2022 - it was primarily C&IB (corporate and institutional banking) that was up based on higher levels of M&A, DCM and lending activity.

Risks and Looking Forward

Going forward, the main concern for National Bank of Canada is whether the company can see a boost in net interest income going forward. While non-interest income was lifted by growth across the Financial Markets segment (specifically C&IB) - there is no guarantee that such activity will continue to see growth if economic activity continues to see a decline. We have already seen a decline in Global Markets revenues from that of last year, and a continuing decline could affect net income overall.

Additionally, the next two quarters will be significant indicators as to whether net interest income across the Personal and Commercial side can continue to rise under a higher-rate environment. We have seen that while net interest income across the Personal and Commercial segment has continued to remain at steady levels since the latter half of 2021 - the segment could still be at risk if loan demand across this segment sees a decline under worsening economic conditions, or if the bank needs to set aside further funds to guard against bad debts - further putting performance across this segment at risk.

Conclusion

To conclude, National Bank of Canada has seen a decline in overall net income from the previous year. A decline in financial markets activity affected net interest income overall - despite stable performance across the Personal and Commercial segment. In this regard, I take the view that the economic environment remains too uncertain for National Bank of Canada at this time and growth is likely to remain modest.

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