In addition, National Bank and Scotiabank also recently raised their targets to $41.00 and $45.00 respectively. GLTA
First National Financial Corp.
(FN-T) C$40.02
Fundamentals Intact, Originations Outlook Mixed
Event
Q4/23 conference call
Impact: NEUTRAL
Q4/23 results were strong, in our view, with earnings above us (in-line with
consensus), and solid originations and MUA growth (+10% y/y). The originations
outlook for 2024 is somewhat mixed, in our view, with single family expected to be
soft in H1/24 (higher rates and competition) and commercial likely solid in H1/24, but
potentially slower in H2/24 (higher competition). Our target price moves to $44.00
(from $41.00) due to higher estimates and rolling forward valuation. At 10.4x
2024E EPS, valuation appears reasonable. We maintain our HOLD rating.
Q4/23 results were above us but in-line with consensus. Adjusted EPS of
$0.93 was above our $0.81 estimate (consensus was $0.92). The beat was largely
from higher institutional placement funding and strong securitization NIM.
NIM in 2023 benefited from low prepayment levels, and securitzation
of higher-margin Excalibur mortgages. Management believes NIM can be
maintained at current levels for 2024. We are modeling some NIM compression
in 2025 as rates potentially come down (and prepayment activity picks up).
Single-family origination volumes could remain soft over the near-term
(high interest rates and elevated competition from the big banks).
Commercial volumes are expected to remain strong in H1/24 (multi-unit pipeline)
but management sees potential for higher competition to surface in H2/24
(incented by the higher CMB program limits). We are forecasting overall
originations (and renewals) to be +4% in 2024 and +6% in 2025.
The Excalibur Alt-A product is showing only a modest increase in arrears.
Credit losses have been minimal given the <80% LTV at origination. While
management acknowledged increased pressure around construction lending in
the industry, they noted their own book is performing well (primarily CMHC-insured
construction lending).
TD Investment Conclusion
First National is a solid income-generating investment, and we value the low-credit-
risk 'originate-to-sell' model. Earnings can be volatile q/q due to funding mix, interest
expense movements, and seasonality. Earnings growth was solid in 2023, but we
think growth may be more muted in 2024 if rates begin to decline. We view current
valuation as reasonable.