March 29, 2024 5:10 AM

Why the National Bank of Canada can survive an economic crisis

Is the National Bank of Canada equipped enough to survive an economic downturn? We take a quick look.

/ Published 5 years ago

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The National Bank of Canada (TSE:NA) has faced many ups and downs throughout the years, what with it being in the center of a fairly volatile industry in a forward-thinking country such as Canada. Currently led by its CEO Louis Vachon and headquartered in Montreal, the NA is currently the sixth largest commercial bank in the country, and has over 2.4 million personal clients spread throughout Canada’s many provinces. But is it strong enough to survive the next financial crisis?

Historically, the nation has fared much better when it comes to economic downturns. As a matter of fact, per Forbes, when the United States was struggling through the 2008 economic crisis that left thousands in financial peril, Canada was merely experiencing relatively minor pains, without any bank failures or bailouts, with its overall recession less severe than its Southern neighbors. But can it keep up this time? Or more specifically, can its banks get by with the times?

A strong player

Considered as a “too-good-to-fail” bank, NA is currently held to strict regulation, which focuses investor attention to both the type and level of risks it decides to take on. Furthermore, the bank has a leverage ratio of 18.07x, which is significantly below the ceiling of 20x. Considering that a bank’s level of leverage determines its level of risk and ability to pay back its investors, then it’s fair to say that the bank has more than enough strength to repay its debtors in case of a sudden adverse event, such as an economic crisis. In fact, due to plenty of headroom, it can even increase its debt levels to further firm up its capital without putting its financial position at risk in the slightest bit.

economic crisis
Banks usually operate by lending out deposits as loans and charging an interest rate that is higher. (Source)

In addition, the National Bank of Canada’s liquidity has a ratio of 53 percent. Take in the fact that this important asset class should take about 70 percent of overall assets, and the bank easily proves how good of a balance it has between its interest income and overall liquidity.

Banks usually operate by lending out deposits as loans and charging an interest rate that is higher. Currently, the bank’s loan to deposit ratio is at 82 percent, meaning that it’s within the sensible margin, and is below the appropriate maximum of 90 percent as well. This puts the bank at a cautious position in terms of liquidity, although the whole of its position can more than make up for it in the long run, since it has already managed to retain an apt level of deposits.

Based on this data, it’s clear that the National Bank of Canada holds a strong position in the playing field, what with it having a favorable liquidity and leverage position that exposes it much less risk than other competitors. For any investor out there who believe an economic crisis might come soon, taking shelter in the National Bank of Canada will do you good, as the bank is equipped enough to navigate through such an event.

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