National Bank of Canada has delivered some bad news over the past 18 months: It has diluted investors by issuing new shares, taken an embarrassing writeoff on an investment and rattled observers with its large exposure to the troubled energy sector.
But the stock has soared.
Since Oct. 1, 2015, when the lender issued the first of its trio of disappointments, National Bank's share price has risen about 38 per cent (including dividends).
This total return has beaten the broad S&P/TSX composite index by more than 13 percentage points. It also topped the average gains from the bank's five bigger peers, including Toronto-Dominion Bank and Canadian Imperial Bank of Commerce.
The stellar performance raises two questions: Why has the market looked past the bad news and will National Bank continue to outshine its rivals?
For answers to both, look to Quebec.
The Montreal-based lender is nowhere near as diversified as the other Big Six banks. Though it has a national presence and is keen to expand internationally, 60 per cent of its revenue in fiscal 2016 flowed from La Belle Province.
This concentration in one province might not appeal to investors when Quebec is lagging economically, but this isn't the case today.
Quebec is doing surprisingly well, thanks to the positive impact of the lower Canadian dollar.
Economists at RBC recently raised their expectations for real economic growth to 1.8 per cent in 2017, up from a previous estimate of 1.6 per cent.
While that's not exactly fast-paced growth, it is moving in the right direction.
Even better, labour conditions are improving. The province's unemployment rate declined to 6.2 per cent in January, touching its lowest level in at least 40 years, after employers added 89,000 new jobs over the last six months of 2016.
"The best labour-market conditions in memory send a positive message about the state of the Quebec economy as 2017 begins," Robert Hogue, an economist at RBC, said in a recent note.
Provincial economic stimulus and federal infrastructure spending could deliver a further boost, he added.
National Bank, then, is at the right place at the right time: Employed people in an expanding economy make good bank customers.
In contrast, National Bank's recent setbacks have little to do with this Quebec base, which is why investors may be in a forgiving mood.
The bank had to raise $300-million in a new share offering in 2015 because lower notional values for its bond holdings had eroded the bank's financial strength below a key regulatory threshold.
Soon after, it booked a $165-million charge against its investment in Maple Financial Group of Canada in February, 2016. The charge related to the shutdown of Maple Bank, a German subsidiary, after an investigation into its trading activities.
Most recently, National Bank set aside $250-million last May to cover bad loans. The provision largely addressed loans to the energy sector, where the bank had an exposure that was considerably larger than most of its peers.
To be fair, concerns about loans to the energy sector have largely dissipated as the price of crude oil has rebounded above $50 (U.S.) a barrel.
Nonetheless, this trio of setbacks raised the prospect that this was an accident-prone bank, and no doubt reinforced the idea that the stock deserves to trade at a discount to its peers. National Bank shares currently trade at just 10.6-times estimated profit – the lowest among the Big Six.
Yet National Bank has eased concerns with upbeat financial results that reflect the strength of its home base.
In its 2017 fiscal first quarter, the lender's profit rebounded to $1.34 a share, double the profit from the first quarter of 2016, when the Maple Bank charge appeared.
In particular, profit from its personal and commercial-banking division rose a dazzling 18 per cent year-over-year, or 13 per cent after a one-time adjustment.
National Bank is pursuing greater geographic diversification, but investors seem to like it just the way it is.