National Bank of Canada (TSX:NA) has been steadily making its mark as one of Canada's prominent financial institutions. As we look toward 2025, the stock presents an intriguing blend of opportunity and caution. Known for its strong regional dominance, particularly in Quebec, and its ability to diversify income streams, National Bank stock is well-positioned to deliver solid shareholder value. Let's break down the key elements shaping its outlook as we move into the new year – from recent earnings to broader market sentiment.

Into earnings

In its most recent earnings report for the fourth quarter of 2024, National Bank posted a net income of $955 million. A remarkable 27% increase compared to the same period in 2023. Diluted earnings per share (EPS) came in at $2.66, up from $2.09. This exceeded analysts' expectations and underscored the bank's continued financial strength. This impressive growth was driven by exceptional performance in wealth management. This saw adjusted net income grow by 17% year-over-year to $219 million.

Looking at the big picture, National Bank's revenue for the trailing 12 months reached $10.6 billion, thus representing 19.7% year-over-year growth. The return on equity (ROE), a key metric that measures profitability against shareholder equity, stands at 15.2%, thereby affirming the bank's effective use of its capital to drive returns. Notably, analysts project that the bank will maintain a strong ROE of 16.1% over the next three years. This is well above industry averages.

Dividends and value

One area where National Bank stock shines is its dividend performance. The bank offers a forward annual dividend rate of $4.40. With a payout ratio of 41.3%, this dividend appears highly sustainable, leaving ample room for reinvestment in growth initiatives. National Bank consistently rewards shareholders while maintaining a strong balance sheet. This should give income-focused investors confidence as they look to 2025. Over the past five years, the bank's average dividend yield has hovered around 3.7%, further cementing its reputation as a reliable dividend stock.

From a valuation perspective, National Bank stock is trading at a trailing price-to-earnings (P/E) ratio of 12.5, and a forward P/E of 12.4, thus making it more affordable than some of its larger peers. While not the cheapest on the market, its valuation is reasonable given its growth trajectory, strong profitability, and robust financial health. Its price-to-book ratio of 1.9 remains attractive when compared to its historical averages and suggests that the stock isn't overpriced at current levels.

Looking ahead

While National Bank's fundamentals remain strong, there are areas investors should monitor heading into 2025. The gross impaired loan ratio, which increased to 68 basis points in Q4, is a sign of potential pressure in its credit portfolio. While this remains manageable, it reflects broader economic uncertainties, such as the risk of higher interest rates impacting borrowers. That said, National Bank's conservative approach to risk management and strong cash reserves, over $163 billion in total cash, position it well to absorb any near-term shocks.

Strategically, National Bank has been making moves to expand its presence in wealth management, fintech partnerships, and sustainable finance initiatives. These efforts, paired with the bank's focus on digital transformation, are expected to support long-term growth. For instance, its investment in advanced technology and mobile banking solutions has allowed it to remain competitive in attracting younger clients while improving operational efficiency. As Canada's economy continues to recover, these growth strategies should drive value for shareholders in the years ahead.

Bottom line

National Bank offers a compelling story for investors as we move into 2025. With solid earnings growth, a sustainable dividend, and a reasonable valuation, the stock remains an attractive option for both growth and income-focused investors. Some challenges lie ahead, such as rising impaired loans and margin pressures. Yet the bank's strong capital position, strategic initiatives, and consistent performance provide confidence that it can navigate any economic turbulence. National Bank stands out as a solid Canadian investment poised to hold its own in the financial sector, especially for those seeking stability and income.