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The entrance for National Bank on the corner of York St. and Adelaide St. West in Toronto's Financial district.Charla Jones/The Globe and Mail

National Bank of Canada announced on Monday that it has doubled its stake in a Cambodian bank, less than one week after the Canadian lender said it would take a substantial hit on loans to the energy sector in its second-quarter results.

The decision to increase its stake in ABA Bank of Cambodia to 90 per cent from a 42-per-cent investment – marking National Bank's first controlling stake in a foreign bank – suggests two things.

First, National Bank is committed to its strategy of diversifying beyond its Quebec roots with targeted investments in select regions, or what the bank calls a "supra-regional" strategy. ABA Bank comes with about $925-million (U.S.) in assets, 1,300 employees and 35 branches.

Previously, National Bank has taken stakes in NSIA Participations SA, based in Ivory Coast, and Mauritius-based AfrAsia Bank Ltd., two French-speaking nations that mesh well with its francophone base.

Second, and perhaps more importantly, Monday's move suggests that the bank feels confident about its capital levels, despite three successive reductions over the past six months.

The $103-million investment in ABA Bank will reduce National Bank's common equity Tier 1 ratio (CET1) – a measure of financial strength watched closely by regulators – by about 0.18 percentage points.

That follows a 0.16-percentage-point reduction announced last week when the lender said it would take a $250-million (Canadian) provision against bad loans to the energy sector. In February, National Bank wrote off its $165-million stake in Maple Financial Group Inc., reducing the CET1 ratio by 0.13 percentage points.

As a result of these reductions, National Bank will likely report a CET1 ratio of 9.7 per cent in the second quarter, unchanged from the first quarter but the lowest among the Big Six and just barely above the minimum of 9.5 per cent preferred by regulators.

Clearly, National Bank is confident it can generate capital. It noted that its focus now is on consolidating existing operations rather than making any more significant international investments.

Analysts said that ABA Bank looks good as an investment: The bank is growing fast and should add at least 5 cents a share to National Bank's per-share profit in 2016, rising to 10 cents a share in a full year. This implies an 18-per-cent return on investment in fiscal 2017, according to Darko Mihelic, an analyst at RBC Dominion Securities.

But not everyone, including Mr. Mihelic, is sold on the bank's supra-regional strategy as it applies to Cambodia.

"National Bank has historically been careful with capital deployment but expansion into a new and emerging market like Cambodia is clearly very different and in our view outside of the expertise of the bank's management team," Mr. Mihelic said.

Robert Sedran, an analyst at CIBC World Markets, remarked that Cambodia enjoys attractive demographics and stronger economic growth than National Bank's home market in Canada.

"Realizing that potential when it is on the other side of the world – literally and figuratively – will require strong execution and probably a little luck," Mr. Sedran said in a note. "As we have seen with other banks (and, for that matter, this bank) as they venture far from home, the luck they get is not always good."

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