National Bank of Canada: A Contrarian Bet on Canada’s Economic Recovery

Take a closer look at why National Bank of Canada (TSX:NA) is an attractive play on Canada’s economy.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Canada’s banks continue to attract considerable negative attention from investors, because of fears of a housing meltdown and Canada’s slowing economic growth and exposure to a beleaguered energy patch. For these reasons, National Bank of Canada’s (TSX:NA) share price has been hit hard and is down by 14% over the last year. This, I believe, makes it attractively priced, making now the time to add Canada’s sixth-largest bank to your portfolio. 

Now what?

National Bank’s business is predominantly focused on eastern Canada, which makes it relatively immune to the ructions being caused by the sharp slump in crude.

In fact, of Canada’s six largest banks, it has the lowest direct exposure to the beleaguered energy industry; the total value of its loans to the energy patch is $3.2 billion, or 2.7%. Whereas Toronto Dominion Bank has about $6 billion of drawn loans to the energy patch, and the Bank of Nova Scotia’s exposure is a whopping $16.5 billion.

It should also be noted that National Bank’s indirect exposure to the energy patch is negligible; just under 10% of its total loans are located in Alberta and Saskatchewan.

Meanwhile, the prospect of a U.S.-style housing meltdown in Canada is extremely unlikely, but analysts do expect the real estate market to cool, and this, along with a slowing economy, will impact short-term earnings growth for the banks.

However, any slump in the housing sector will have a minimal impact on National Bank because of the high quality of its loan portfolio. Its ratio of gross impaired loans to total loans is a mere 0.36%, well below this ratio for the other major banks.

Furthermore, 45% of its mortgages are insured, and its uninsured mortgages have a conservative loan-to-valuation ratio of around 70%, again ensuring that the impact of any property crash will be minimal.

National Bank also has minimal exposure to the property market in western Canada, which is considered to be the most vulnerable to a market crash. The bank has less than 6% of its mortgages located in Alberta and Saskatchewan.

Despite the difficult operating environment, National Bank continues to perform well. For the first quarter 2016, it reported a 4% year-over-year increase in net income, which was underpinned by a solid performance from its personal and consumer banking business. It also continues to maintain tight control of costs, reporting an efficiency ratio of 58.6% for the same period, an improvement of 10 basis points compared with the same quarter in 2015. And it remains well capitalized with a tier one common equity ratio of 9.7%, which is well above the regulatory minimum.

Investors shouldn’t forget about National Bank’s dividend. With a juicy yield of 5.2% and a very sustainable payout ratio of 43.5%, it’s particularly attractive for income-hungry investors. 

So what?

I believe that the risks associated with Canada’s banks are over baked and the recent sell-off is unjustified. Nonetheless, National Bank is now attractively priced, making it a solid contrarian play on an eventual upturn in Canada’s economy. And it has juicy dividend yield, which will consistently reward investors while they wait for the share price to appreciate.

Should you invest $1,000 in National Bank of Canada right now?

Before you buy stock in National Bank of Canada, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and National Bank of Canada wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $18,750.10!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 35 percentage points since 2013*.

See the Top Stocks * Returns as of 1/22/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

If You Thought Apple and Microsoft Were Big, You Need to Read This.

The steel industry produced the world's first $1 billion company in 1901, and it wasn't until 117 years later that technology giant Apple became the first-ever company to reach a $1 trillion valuation.

But what if I told you artificial intelligence (AI) is about to accelerate the pace of value creation? AI has the potential to produce several trillion-dollar companies in the future, and The Motley Fool is watching one very closely right now.

Don't fumble this potential wealth-building opportunity by navigating it alone. The Motley Fool has a proven track record of picking revolutionary growth stocks early, from Netflix to Amazon, so become a premium member today.

See the 'AI Supercycle' Stock

More on Dividend Stocks

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Maximizing Returns with Your 2025 TFSA Contribution Room

The TFSA is a top tool for maximizing investment returns. Here are two stocks that could be a great buy…

Read more »

woman retiree on computer
Dividend Stocks

Should You Buy Telus Stock at $20?

Down 40% from all-time highs, Telus is a beaten-down TSX dividend stock that trades at a discount to consensus price…

Read more »

top TSX stocks to buy
Dividend Stocks

Here’s Exactly How $15,000 in a TFSA Could Grow Into $200,000

Canadians with sizeable TFSA balances today have utilized the full potential of the investment vehicle.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

The 1 Canadian Stock I’d Buy and Hold Forever in a TFSA

Don't get complicated. Consider this Canadian stock as a long-time buy.

Read more »

Man data analyze
Dividend Stocks

A Top-Performing U.S. Stock That Canadian Investors Really Should Own

This top US tech stock is something you cannot miss out on, and there’s another from Canada that you need…

Read more »

how to save money
Dividend Stocks

3 Premium TSX Dividend Stocks Worth Loading Up On

These three premium TSX dividend stocks remain among the best bets for long-term investors seeking stable total returns.

Read more »

Hand Protecting Senior Couple
Dividend Stocks

3 Canadian Dividend Stocks Perfect for Retirees

These three Canadian stocks are ideal for retirees.

Read more »

Middle aged man drinks coffee
Dividend Stocks

Should You Buy Goeasy Stock While It’s Below $170?

Goeasy stock still looks like a winner, so why is the stock price down below $170?

Read more »