National Bank of Canada is touting its heavy exposure to Quebec amid a shifting national economic outlook, arguing that recent strength in its home province will be a boon to its bottom line in the near future.
“As a superregional bank with leading market share in Quebec, we are well positioned to benefit from the strength of the Quebec economy,” chief executive Louis Vachon said on a conference call on Wednesday to discuss the bank’s fourth-quarter results. “Unemployment has been at historical lows for several years, business confidence is high and the province has recorded three consecutive budget surpluses.”
The narrative marks a significant shift for the country’s sixth-largest lender. Montreal-based National Bank spent years pushing west, hoping to increase its market share in provinces such as Ontario and Alberta. Today, however, Quebec’s economy is glowing and the lender is happy to proclaim its exposure.
At the moment, National Bank generates about 60 per cent of its revenue in Quebec. In fiscal 2018, National Bank’s profit jumped 10 per cent to $2.2-billion.
The bank’s return on equity sits at 18.4 per cent, which is the highest of the Big Six banks – largely due to its domestic exposure. ROEs are much higher in Canada and the five rival banks have all been boosting their footprints outside of their home borders.
Five years ago, National Bank was much more focused on playing down its exposure to traditional banking in its home province. Quebec was highly indebted and Alberta seemed to be the country’s growth engine. To expand, National Bank made a splash lending to junior oil and gas companies and its financial-markets arm was often thought of as its strength, largely because of its respected derivatives business.
Almost the exact opposite is true today. While National Bank still has energy exposure, its loans to the sector as a percentage of its total portfolio have been chopped in half since 2016, and last year, revenues from wealth management topped those from the financial-markets division for the first time.
For the next few years, National Bank is counting on traditional banking from its home province to bolster its profit. “Looking forward, we’ll maintain our overweight position in Quebec in secured lending and in commercial banking, which we view as favourable in the current economic environment,” Mr. Vachon said.
National Bank isn’t solely counting on Quebec’s strength to grow. The lender has also embarked on a transformation project to make it a much leaner and efficient organization, one that does away with a lot of manual tasks. Ninety per cent of core banking transactions – for example, client bill payments – are now completed using “unassisted channels” such as mobile and online banking.
National Bank’s efficiency ratio, which measures non-interest expenses as a percentage of total revenues, fell to 54.6 per cent at the end of fiscal 2018. Five years ago, the ratio sat at 58.6 per cent.
National Bank’s shares closed at $60.20 on Wednesday, up 14 cents for the day.