Economic Uncertainties And Rising Taxes Threaten Bank's Profit Margins And Earnings Stability

Key Takeaways

• The acquisition of Canadian Western Bank is central to the National Bank's domestic growth, enhancing market presence and future revenue.
  
• Economic uncertainties and rising tax rates may pressure net margins and impact profitability amidst robust commercial loan growth.
  
• Strong earnings growth, strategic acquisition plans, and a robust capital position highlight National Bank of Canada's potential for future growth and enhanced market presence.

Catalysts

Provides financial services to individuals, businesses, institutional clients, and governments in Canada and internationally.

• The proposed acquisition of Canadian Western Bank is expected to be a key pillar in National Bank's domestic growth strategy starting in 2025, potentially impacting future revenue growth as the bank expands its market presence and integrates complementary platforms.
  
• Economic uncertainties such as slower growth in the Canadian economy, high interest rates, and divergent trade policies in North America could dampen consumer spending and business investments, potentially impacting net margins and earnings.
  
• Interest rate environment and implementation of Pillar 2 tax rules in Europe may increase the bank's effective tax rate by 1% to 2%, potentially compressing net margins and affecting overall profitability.
  
• Commercial loan growth, expected to continue in the low teens, indicates confidence in robust lending across various industries and geographies, but this expansion might strain net margins if credit conditions worsen.
  
• ABA bank's growth in a challenging local economy could pose risks; while increased deposits and expanded client base bolster revenue potential, elevated provisions for credit losses in 2025 might affect net margins and earnings stability.

National Bank of Canada Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming National Bank of Canada's revenue will grow by 14.3% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.8% today to 20.3% in 3 years time.
• Analysts expect earnings to reach CA$3.3 billion (and earnings per share of CA$9.65) by about December 2027, down from CA$3.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 17.7x on those 2027 earnings, up from 12.8x today. This future PE is greater than the current PE for the CA Banks industry at 13.1x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

National Bank of Canada Future Earnings Per Share Growth

Risks

• National Bank of Canada reported strong earnings growth, including a 10% EPS increase and ROE of 17% for 2024, indicating robust financial health and potential for continued earnings growth in the coming years.
  
• The bank's Wealth Management and Financial Markets segments delivered significant earnings growth, with Wealth Management up 12% and Financial Markets up 18%, suggesting strong ongoing revenue potential in these areas.
  
• The proposed acquisition of Canadian Western Bank is expected to be a key pillar for domestic growth, which could enhance revenue and earnings through strategic synergies and expanded market presence.
  
• Commercial and personal loan growth showed strong momentum, with commercial loans up 14% in Q4, and personal loans, including mortgages, continuing to grow, which could positively impact revenues.
  
• The bank's robust capital position, with a CET1 ratio of 13.7%, provides a strong foundation for future growth opportunities and shareholder returns, including the potential for further dividend increases or share buybacks, supporting net margins and earnings stability.

Valuation

• The analysts have a consensus price target of CA$140.5 for National Bank of Canada based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$154.0, and the most bearish reporting a price target of just CA$109.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be CA$16.2 billion, earnings will come to CA$3.3 billion, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of CA$133.87, the analyst's price target of CA$140.5 is 4.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.