Are You Considering All The Risks For National Bank of Canada’s (TSE:NA)?

By
Simply Wall St
Published
November 28, 2018
TSX:NA
Source: Shutterstock

Post-GFC recovery has strengthened economic growth and credit quality, benefiting large banks such as National Bank of Canada (TSE:NA), with a market capitalisation of CA$20b. Economic growth fuels demand for loans and affects a borrower’s ability to repay which directly impacts the level of risk National Bank of Canada takes on. As a consequence of the GFC, tighter regulations have led to more conservative lending practices by banks, leading to more prudent levels of risky assets on their balance sheets. Since the level of risky assets held by a bank impacts its cash flow and therefore the attractiveness of its stock as an investment, I will take you through three metrics that are insightful proxies for risk.

View our latest analysis for National Bank of Canada

TSX:NA Historical Debt November 28th 18
TSX:NA Historical Debt November 28th 18

How Much Risk Is Too Much?

National Bank of Canada is considered to be in a good financial shape if it does not engage in overly risky lending practices. So what constitutes as overly risky? Loans that cannot be recovered by the bank are known as bad loans and typically should make up less than 3% of its total loans. Loans are written off as expenses when they are not repaid, which comes directly out of National Bank of Canada’s profit. The bank's bad debt only makes up a very small 0.46% to total debt which means means the bank has very strict bad debt management and faces insignificant levels of default.

How Good Is National Bank of Canada At Forecasting Its Risks?

The ability for National Bank of Canada to accurately forecast and provision for its bad loans shows it has a strong understanding of the level of risk it is taking on. If the level of provisioning covers 100% or more of the actual bad debt expense the bank writes off, then it is relatively accurate and prudent in its bad debt provisioning. With a bad loan to bad debt ratio of 104.44%, the bank has cautiously over-provisioned by 4.44%, which illustrates a safe and prudent forecasting methodology, and its ability to anticipate the factors contributing to its bad loan levels.

How Big Is National Bank of Canada’s Safety Net?

Handing Money Transparent National Bank of Canada operates by lending out its various forms of borrowings. Customers’ deposits tend to carry the smallest risk given the relatively stable interest rate and amount available. Generally, the higher level of deposits a bank retains, the less risky it is deemed to be. Since National Bank of Canada’s total deposit to total liabilities is within the sensible margin at 68% compared to other banks' level of 50%, it shows a prudent level of the bank's safer form of borrowing and an appropriate level of risk.

Next Steps:

The recent acquisition is expected to bring more opportunities for NA, which in turn should lead to stronger growth. I would stay up-to-date on how this decision will affect the future of the business in terms of earnings growth and financial health. The list below is my go-to checks for NA. I use Simply Wall St's platform to keep informed about any changes in the company and market sentiment, and also use their data as the basis for my articles.

  1. Future Outlook: What are well-informed industry analysts predicting for NA’s future growth? Take a look at our free research report of analyst consensus for NA’s outlook.
  2. Valuation: What is NA worth today? Has the future growth potential already been factored into the price? The intrinsic value infographic in our free research report helps visualize whether NA is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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