Narrow-moat National Bank of Canada (NA) reported good fiscal third-quarter results, all things considered. The strain from provisioning was much lower in the third quarter compared with the second quarter, and diluted earnings per share came in flat year over year at $1.66. Flat EPS is a remarkable feat considering the economic backdrop. Preprovision net revenue growth was 5%, showing the resiliency of core revenue, while provisioning was $143 billion, up roughly 66% year over year but down significantly from the $504 billion provisioning charge in the second quarter. Return on equity was a strong 17% as NBC turned in a performance that will once again likely be at the top of the Canadian banks.
The trend in provisioning was better than what we saw for BMO and Scotiabank and more in line with Royal Bank of Canada, which reported its third quarter on the same day as NBC and saw provisioning decline materially. We were largely expecting the high-water mark for provisioning to be in the third quarter for most banks, so this has been a pleasant surprise. Of course, the ultimate question is whether NBC is adequately reserved. With roughly 4% of total loans estimated to be more sensitive to the impacts of COVID-19, the bank has one of the lowest estimated exposures here, and its ratio of loan-loss reserves to gross loans isn’t far behind peers, so we don’t see an obvious imbalance.
Given NBC’s resilient earnings profile, current reserve levels, and the more limited higher-risk credit exposures, we think the bank remains well positioned to weather the COVID-19 storm. As we incorporate third-quarter results into our projections, we do not plan to materially change our $74 fair value estimate. The market price has moved back to within a couple of dollars of our fair value estimate, reducing the likelihood of future outperformance, in our view, after gaining over 80% since the bottom in late March.
NBC’s common equity Tier 1 ratio remained steady at 11.4%. NBC was still seeing risk-weighted asset expansion during the quarter, something peers did not have to deal with; otherwise, NBC’s CET1 ratio could have increased. Deferral stats have generally been encouraging, with 98% of expired retail real estate-related deferrals resuming regular payments upon expiration of their deferral. Deferral balances have also been declining materially, particularly in the retail lending programs, dropping from over $9 billion in the second quarter to roughly $3.7 billion in the third quarter. Roughly 5.6% of total loans remain in some state of deferral, and nonretail deferrals have remained at roughly the same level since last quarter, but the initial stats have been encouraging.
