National Bank's Q2 Miss: A Sector-Wide Wake-Up Call or an Isolated Hurdle?

As National Bank of Canada (TSX: NA) prepares to report Q2 2025 earnings on May 28, investors are bracing for a potential earnings miss that could signal broader vulnerabilities in Canada's banking sector. With consensus estimates pointing to a 5.5% year-over-year drop in EPS to $2.40 from $2.54, the question remains: Is this a temporary stumble for National, or a symptom of systemic challenges facing Canadian banks? Here's what the numbers—and the competition—reveal.

National Bank's Q2: A Perfect Storm of Challenges?

National's Q1 2025 results were a bright spot, with EPS surging 13% to $2.93, driven by stellar performances in Wealth Management (+23%) and Financial Markets (+35%). However, Q2's softer forecast reflects growing headwinds. Analysts cite three key risks:

1. Macroeconomic Uncertainty: Tariff disputes and trade policy shifts have dampened business and consumer confidence, slowing loan growth. National's CET1 ratio, a key measure of capital strength, remains robust at 13.6%, but rising credit provisions (a sector-wide trend) could pressure margins.
2. Integration Costs: The acquisition of Canadian Western Bank (CWB) in 2024 has yet to deliver full synergies, with integration costs and compliance demands weighing on short-term results.
3. Sector-Wide PCL Hikes: National's provisions for credit losses are expected to rise, in line with a 14.5%–79% increase across the Big Six banks. This trend reflects cautious underwriting in anticipation of economic slowdowns.

Sector Comparison: National Isn't Alone in the Storm

While National faces its own hurdles, its challenges mirror broader trends in Canada's banking sector:

• TD Bank (TSX: TD): Beat Q2 estimates with a $1.97 EPS, but its U.S. retail division is hamstrung by $3.1 billion in anti-money laundering penalties. Despite strong margins, regulatory overhang persists.
• Royal Bank (TSX: RY): Expected to lead with an 11% net income rise, fueled by its HSBC Canada acquisition and diversified revenue streams. Analysts rank it as their top pick for stability.
• BMO (TSX: BMO): Struggles with a 7.6% earnings drop and a 49% PCL jump, highlighting execution risks in its U.S. commercial lending business. Nine of its past 12 quarters missed estimates.
• CIBC (TSX: CM): A consistent outperformer, with six straight quarters of EPS beats. Its CWB acquisition is boosting wealth management, though it's not immune to trade-related PCL hikes.

Valuation Implications: Are Banks Overpriced, or a Safe Haven?

Canadian banks trade at an average P/E of 11.4 (National's is 11.43), below their 10-year average of 13.5. This discount reflects macro fears, but fundamentals remain sturdy:

• Capital Strength: Tier-one capital ratios have improved by 200 basis points since 2020, giving banks a buffer against loan losses.
• Dividend Resilience: Analysts project dividend increases for RBC (2.7%), National (2.6%), and BMO (2.6%), underscoring balance sheet health.
• Recession Readiness: Banks are “as recession-ready as ever,” per Scotiabank analysts, but trade wars could still disrupt loan portfolios.

The sector's 3.5% average dividend yield offers defensive appeal, but valuation multiples hinge on clarity around economic direction. A miss by National could pressure multiples further—if the broader sector is seen as vulnerable.

Investment Takeaways: Proceed with Caution, but Stay Selective

• Hold National Bank: While its Q2 miss is a concern, its 3.5% dividend yield and 13.6% CET1 ratio offer downside protection. Investors should await management's outlook on CWB integration and PCL trends before selling.
• Favor RBC and CIBC: RBC's scale and diversification, plus CIBC's consistent earnings, make them safer bets amid uncertainty.
• Avoid BMO and Scotia: Until BMO addresses U.S. commercial lending slumps and Scotia clarifies its international strategy, their stocks lag.

The Canadian banking sector isn't collapsing—but it's no longer a “buy-and-forget” trade. Investors must prioritize banks with strong capital positions, diversified revenue streams, and minimal exposure to U.S. regulatory risks.

Final Word: Navigating the Crossroads

National's Q2 miss is a warning shot, but not yet a red flag. The broader sector remains resilient, with capital ratios and dividends holding firm. However, trade wars and slowing loan growth mean investors must be selective. For now, RBC and CIBC offer the best balance of growth and stability. National's stock, while volatile, could rebound if it delivers on CWB synergies—a scenario worth monitoring closely.