National Bank of Canada’s Risk Exposure Seems Stable. (OTCMKTS :NTIOF).

Thesis on InvestmentDespite an uncertain macroeconomic climate, National Bank of Canada seems capable of managing its loan exposure very well and is in a good place to continue growing net income and non-interest income.

The National Bank of Canada (OTCPK NTIOF) saw a significant increase in 2021. However, the stock has been consolidating in the past few months.

This article will examine the potential stock trajectory given current inflation and geopolitical tensions.

Recent Performance

Due to the steady rise of inflation since 2020, the bank’s net interest income and other income have grown by over 12% over the course of the year from 2020 to 2021.

Particularly, we continue to see strong quarterly growth on both of these counts – with net and noninterest income up over 11% from Q4 2020-21 to Q1 2022.

Looking at the bank’s risk exposure breakdown, it is clear that Residential Mortgages account for the majority of retail loans exposure, while real estate accounts to more than 20% of non-retail loans.

The National Bank of Canada’s loan exposure to real property and the wider housing market is high. It is important that we consider how macroeconomic factors may impact our future performance.

Holistically, average loans to assets have remained more or less the same – with a slight decrease from 46.2% to 47.7% during Q1-2021.

In this respect, inflation has not yet impacted the bank’s ability to manage its risk exposure. A significant increase in the loan-to-asset ratio can be more risky for banks due to higher defaults. However, the ratio has remained stable which is encouraging.

Looking forward

Inflationary periods are often accompanied by an increase in real estate prices. One possibility in this regard is that we could see an increase in mortgage demand in the short and medium term as more people seek to buy property before significant price increases. Home ownership could also become more attractive in the future. Buyers will want to protect themselves against inflation and secure a lower mortgage than what might be possible in the future.

However, rising prices could increase the risk of defaulting on mortgages. Inflation could make housing more costly for many buyers.

We also see that the bank has a very limited exposure to Oil & Gas and Pipelines. They account for less than 5% of the total portfolio. While the United States’ ban on oil imports to Russia from Canada represents a significant opportunity for Canadian resources to fill the supply gap, it is likely that this will happen over a longer term timeline.

There has been no change in the situation up to now reportedlyThere hasn’t been much interest in Canada’s production, especially considering that oil prices have remained low since the COVID-19 pandemic. If the sanctions on Russian oil are not lifted, Canada could boost oil exports to the United States. National Bank of Canada could then be in a position to see more loan demand for this segment.

Conclusion

Let me conclude that although the macroeconomic climate remains uncertain, I am cautiously optimistic National Bank of Canada will be capable of withstand inflationary forces and grow both its non-interest and net interest income going forward.

Additional disclosureThis article is provided “as-is” and without warranty. This article is merely my opinion and does not constitute professional investment advice. It is the responsibility and obligation of the reader to do their due diligence before making any investment decision. The author disclaims any liability for any actions taken in reliance on the information contained herein.