3 Reasons to Buy National Bank

Here’s why I think National Bank is the best Canadian banks to buy.

| More on:
The Motley Fool

The Federal Reserve announced it would end its taper program in October, and today hinted it could raise interest rates starting in the first half of 2015. In Canada, inflation hit 2.3% in May, higher than the threshold that the Bank of Canada sets in its monetary policy.

This new economic environment is good news for financial institutions like National Bank of Canada (TSX: NA), which generates the majority of its revenues from both lending and financial markets. Here are three reasons why I think you should look into National Bank.

4% dividend yield and a balance sheet to back it up

National Bank offers the highest dividend yield of all the big banks in Canada with a 4.12% yield as of today and is up 11% in the last three years. It speaks highly of the faith management has regarding future profitability considering it’s nowhere near the biggest bank.  As a comparison, Bank of Nova Scotia (TSX: BNS)(NYSE: BNS) gives you only 3.53% while being almost six times bigger.

A look at the balance sheet shows us that National Bank is in good health to keep that dividend high in the coming years. Its current Tier1 common ratio — A Tier1 common ratio or CET1 is a ratio calculated as the equity capital of the bank divided by its entire risk-weighted assets (a fancy word to define all the assets held by the bank weighted by its credit risk) — is at 11.90%. The national average is 11.95%, and Royal Bank of Canada (TSX: RY)(NYSE: RY) is at 9.60%. Without getting into much detail what’s important to recognize is that the minimum requisite for the CET1 is determined by regulatory entities and the higher it is, the safer.

In the case of a low ratio , a bank will need to either diminish the amount of assets it owns (diminishing its ability to generate profits) or increase its equity capital by issuing additional capital. At 11.90% National Bank is safe to operate without any risk of insufficient capital in the future.

One of the cheapest of its peers

The company is also one of the cheapest of its peers when evaluating it on a price-to-tangible book value per -share. Contrary to industrial or consumer discretionary companies, depository financial institutions should be valued on a price-to-book ratio rather than on a price-to-earnings one. I prefer the price-to-tangible book value per-share because it removes all the goodwill effect and allows me to value the financial institutions for its pure worth.  If we look at the average of the big banks in Canada, the price-to-tangible book value is at 2.73 where National Bank is at 2.67 and Royal Bank is at 3.27. A ratio over two is not cheap on an absolute basis, but we have to remember that unlike certain banks in the U.S., Canadian ones are in much better financial health.

Excellent exposure to performing sectors

More than 75% of National Bank’s revenues comes from both financial markets, personal and commercial lending business. In an economy where the Federal Reserve is ending its tapering program and looking to increase rates in 2015, the volatility that this will bring will be beneficial for the financial division of National Bank. Rising rates, on the other hand, will help the personal and commercial division make more money along their various loans. It will not be the best for us consumers, but as investors, we want higher rates so that banks can increase their net interest margins and with a return on equity over 20% we can anticipate National Bank’s earning power to increase as the volume of loans grows.

Great play for the long term

A Canadian bank is not a growth play; it is a solid foundation for long-term retirement portfolios. Getting a four percent dividend yield reinvested every year is a great way to benefit from compounding interest, and with Canada’s pre-disposition to limit the amount of banks in the country we can be rest assured that National Bank’s best days are ahead of it.

 

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 François Denault has no position in any stocks mentioned.

More on Investing

A Canada Pension Plan Statement of Contributions with a 100 dollar banknote and dollar coins.
Dividend Stocks

3 Reasons Your CPP Benefits Are More Valuable Than You Think

Holding iShares S&P/TSX Capped Composite Index Fund (TSX:XIC) in a TFSA can supplement your CPP.

Read more »

space ship model takes off
Top TSX Stocks

My 5 Favourite Stocks to Buy Right Now

There are plenty of great stocks on the market. Here's a look at my favourite stocks to own for growth…

Read more »

open vault at bank
Dividend Stocks

Don’t Get Cute; Just Buy Stability: Top Defensive TSX Stocks to Buy Now

A healthy risk tolerance is essential for most investors, but many stray from the tried and tested, hoping to find…

Read more »

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

TFSA Investors: Buy These 3 Stocks for $3,480 Yearly Tax-Free Income

One significant benefit of a TFSA-based dividend income is that it doesn’t weigh down your tax bill.

Read more »

a-developer-typing-lines-of-ai-code-while-viewing-multiple-computer-monitors
Tech Stocks

Could Constellation Software Become the Next Berkshire Hathaway?

Constellation Software's (TSX:CSU) capital-allocation strategy is similar to that of Berkshire Hathaway (NYSE:BRK.B).

Read more »

tsx today
Stock Market

TSX Today: What to Watch for in Stocks on Friday, November 8

The TSX Composite benchmark remains on track to end the week with strong optimism as it currently trades with 2.4%…

Read more »

Canadian dollars in a magnifying glass
Dividend Stocks

3 High-Yield Dividend Stocks That Are Screaming Buys Right Now

Are you looking for great income stocks? Here's a trio of high-yield dividend stocks that pay insane yields right now.

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Bank Stocks

Best Stock to Buy Right Now: TD Bank or Manulife Financial?

Manulife continues to see momentum in its business and stock price, while TD Bank stock remains down and out.

Read more »