National Bank of Canada releases its results for the first quarter 2002

• Record net income of $146 million
• Substantial 40% reduction in gross impaired loans
• Dividend increased 14%
• Repurchase of up to 5% of the Bank's common shares

National Bank of Canada declared income before goodwill charges of $146 million or 73 cents per share for the first quarter ended January 31, 2002, compared to $142 million or 71 cents per share for the corresponding quarter of 2001.

In addition, the Board of Directors of the Bank approved a 14% increase in the dividend, raising the quarterly dividend by 3 cents per common share to 24 cents per share.

The National Bank also announced its intention to make a normal course issuer bid. This repurchase program targets a maximum of 9.5 million common shares representing approximately 5% of common shares outstanding. As at February 15, 2002, there were 190,566,755 common shares issued and outstanding. The common shares repurchased under the bid will be cancelled. The purchase of common shares under the normal course issuer bid will be made through the facilities of The Toronto Stock Exchange from March 5, 2002 through March 4, 2003. The Bank has made no normal course issuer bids in the past 12 months.

The Board of Directors is of the opinion that these repurchases are an appropriate use of the excess capital evidenced by the Bank's high regulatory capital ratios. The issuer bid is aimed at increasing shareholder value while maintaining sufficient capital to support business growth.

André Bérard, Chairman of the Board and Chief Executive Officer of National Bank of Canada, expressed his satisfaction with the latest results which were achieved during a difficult time for both the Canadian and global economies.

Mr. Bérard singled out in particular the record earnings in the first quarter and the sizeable decline in impaired loans which were proof of the Bank's concerted efforts to sustain its exceptional performance of recent years.

Other highlights:

• Return on common shareholders' equity before goodwill charges of 15% for the first quarter of 2002
• Gross impaired loans reduced by 40%, from $970 million as at October 31, 2001 to $568 million as at January 31, 2002
• Sale of asset-based lending operations in the United States finalized
• Slight improvement in the efficiency ratio, or operating expenses as a percentage of total revenues on a taxable equivalent basis, from 62.6% for the first quarter of 2001 to 62.2% this quarter
• Record Tier 1 capital ratio of 11.1%

Events in the first quarter

These results can be attributed to the hard work of a large number of people in the National Bank's various business units. Below are a few of the actions taken by the Bank during the first quarter to improve its service offering and achieve its objectives.

• New Multifund GIC: On November 9, 2001, the National Bank officially launched the Multifund GIC, a new guaranteed investment certificate. The return on this product is tied to the performance of a basket of nine mutual funds that invest in Canadian and international markets and belong to four different companies: National Bank Securities, Fidelity Investments, AGF Group of Funds and CI Mutual Funds.

• New National Bank/Fidelity fund: National Bank Securities Inc., a subsidiary of the National Bank, announced the launch of a new fund in its National Bank/Fidelity fund family on November 13, 2001. The return for the new fund, known as the National Bank/Fidelity True North Fund, is entirely based on the Fidelity True North Fund offered by Fidelity Investments. The True North Fund recently passed the five-year mark and its performance for the period earned it a Morningstar five-star rating.

• The Bank expanded its group pension plan offering and signed an administrative agreement with Industrial Alliance: National Bank Trust, a subsidiary of the National Bank, decided to substantially improve its group pension plan product offering by adding new investment vehicles. National Bank Trust also entered into an agreement with Industrial Alliance Trust Company, a subsidiary of Industrial Alliance, Insurance and Financial Services, for the administration of its group pension plans.

• IBM Canada and the National Bank signed a new outsourcing agreement worth more than $1 billion: On December 12, 2001, IBM Canada Ltd. and National Bank of Canada announced the signing of a 10-year, $1.1 billion IT outsourcing agreement. IBM has been providing IT services to National Bank of Canada since 1994. The new contract extends the relationship through 2011. Under the agreement, IBM Global Services will continue to manage the operations of the Bank's IT infrastructure, including its banking systems, Web environment and call centres.

• Natcan acquired Gestion de Placements Valorem inc. of Quebec City: Natcan Investment Management, a subsidiary of the National Bank, announced on December 12, 2001 that it had acquired Gestion de Placements Valorem inc., a Quebec firm specialized in managing Canadian bond and equity portfolios with a value of $1.4 billion. This new acquisition will boost Natcan's assets under management by some 10% and further expand its share of the institutional market in the Quebec City region.

Réal Raymond, President and Chief Operating Officer, recalled that the combination of a difficult economic environment and growing competition among players on financial markets had made it even more important for the Bank to discern the needs of consumers, which was one of the first challenges the Bank had set for itself for the coming years. "In this context, the last quarter enabled us to continue our efforts to improve our product offering and gain market share in the portfolio management market, one of the main areas the Bank has targeted for growth," concluded Mr. Raymond.

Lastly, the goal of creating exceptional value added for our shareholders is paramount, as confirmed by our latest results as well as our commitment to focus more closely on high-potential operations and withdraw from markets that hold little promise. "Despite the economic doldrums that have affected the global economy for close to a year now," Mr. Bérard stated, "the National Bank has once again posted remarkable results that surpass those of all corresponding quarters in the Bank's history."

Quarterly financial statements are available at all times on the National Bank of Canada website at www.nbc.ca/investorrelations.

Conference call on first-quarter results

• A conference call for financial analysts will be held on February 28, 2002 at 3:30 p.m.
• Access by telephone: 1-800-273-9672 or (416) 695-5806.
• Investors and media representatives will be able to listen in on the conference call.
• The conference call will be webcast live at www.nbc.ca/investorrelations.
• Supplementary financial information and a slide presentation are available on the investor relations page of the National Bank's website shortly before the start of the conference call.

Recording of the conference call

• A recording of the conference call can be heard until March 7, 2002 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1075202.
• A recording of the webcast will also be available on the Internet after the call at www.nbc.ca/investorrelations.

MANAGEMENT'S ANALYSIS OF THE FINANCIAL CONDITION AND OPERATING RESULTS

The following text presents management's analysis of the Bank's financial condition and operating results as presented in the unaudited consolidated financial statements for the first quarter ended January 31, 2002.

Strategic Objectives 
As indicated in the 2001 Annual Report, the National Bank has set certain strategic objectives for itself for fiscal 2002 and subsequent years. The results obtained in the first quarter reflect the Bank's commitment to achieving these objectives:

Operating Results
For the first quarter ended January 31, 2002, the National Bank recorded income before goodwill charges of $146 million or 73 cents per share compared to $142 million or 71 cents per share for the corresponding quarter of 2001. Return on common shareholders' equity before goodwill charges was 15.0% as against 16.1% for the first quarter of fiscal 2001.

During the quarter, the Bank re-assessed the realizable value of its portfolio of impaired loans, taking into account current economic conditions and its goal of accelerating the disposal of this portfolio. As a result, a $185 million provision for credit losses was recorded as a revision to the estimated allowance required for the impaired loan portfolio. An additional provision of $60 million was also recorded to cover loan losses on regular operations. Moreover, management estimates that the provision for credit losses for the remainder of fiscal 2002 will amount to approximately $180 million. Given the $65 million reversal of the general allowance recorded under discontinued operations, the net provision for credit losses totalled $180 million for the quarter.

Consequently, the Bank substantially reduced the balance of gross impaired loans as at January 31, 2002. In fact, they now stand at $568 million, down $402 million or 41% from October 31, 2001. As at January 31, 2002, gross private-risk impaired loans represented 13.6% of total tangible capital and the allowance for credit losses, as compared to 22.4% at the end of fiscal 2001. Moreover, the specific allowance of $261 million represents 46% of the gross balance, whereas at the end of fiscal 2001 the specific provisioning rate was 39%. After deducting the $435 million general allowance as at January 31, 2002, net impaired loans posted a negative balance of $128 million as against a positive balance of $91 million as at October 31, 2001, for a substantial improvement of $219 million.

During the quarter, the Bank re-evaluated the adequacy of the general allowance for credit risk, taking into consideration the sale of asset-based lending operations in the United States, loss in the event of default on certain portfolios and the migration of credit quality in the loan portfolio. The required general allowance was therefore determined to be $435 million as at January 31, 2002, for a reduction of $65 million versus October 31, 2001.

Discontinued Operations
On January 15, 2002, the Bank finalized the sale of its U.S. asset-based lending operations which represented approximately $2.5 billion in loans. This transaction generated a pre-tax gain of $141 million, net of transaction-related expenses, including an allowance for credit losses on a $610 million loan portfolio, which is covered by an 18-month service agreement with the buyer. Taking into account the recovery of the $65 million general allowance for this portfolio, as well as the operating results for these operations since the beginning of the fiscal year and income taxes, the net contribution from discontinued operations totalled $118 million.

Results by Segment
Earnings for Personal Banking and Wealth Management amounted to $68 million for the first quarter of 2002, for an increase of 6% compared to the corresponding period of 2001. Net interest income for the quarter was $250 million, up 5% compared to the $238 million for the first quarter of 2001. The increase was chiefly due to wider spreads for personal loans, especially consumer loans and credit card loans, which were partly offset by narrower spreads on transaction accounts because of falling interest rates. Other income at $234 million remained relatively unchanged versus the first quarter of 2001. Operating expenses were $356 million, compared to $342 million for the corresponding quarter of 2001. The increase was mainly attributable to personnel costs as well as initiatives aimed at improving customer service and developing wealth management. The provision for credit losses for the quarter stood at $24 million versus $28 million for the corresponding quarter of 2001.

With regard to Commercial Banking, earnings were $30 million for the quarter as against $35 million for the same period last year. Total revenues were $103 million for the quarter, or the same as for the corresponding period of 2001. This result reflects the drop in demand for credit in several industries. First-quarter operating expenses amounted to $37 million as against $33 million for the corresponding quarter of 2001. The increase was due to the fine-tuning of the methods used for allocating centralized service costs as well as the creation of certain specialized sales teams. The provision for credit losses was $19 million for the quarter compared to $14 million for the corresponding quarter of 2001. The revised rate for loss in the event of default used in the model for calculating expected losses accounted for the increase.

For Financial Markets, Treasury and Investment Banking, first-quarter earnings reached $64 million, up $20 million over the corresponding period a year earlier. Total revenues rose to $206 million, for an increase of $37 million or 22%, mainly as a result of revenues from treasury operations, particularly from asset/liability management and the corporate financing sector. Operating expenses, which increased because of variable remuneration related to revenues, stood at $97 million for the quarter as against $84 million for the first quarter of 2001.

Revenues
Total revenues, on a taxable equivalent basis, were $805 million for the quarter versus $762 million for the first quarter of 2001, for an increase of 6%. Financial Markets, Treasury and Investment Banking was responsible for more than 85% of the rise in revenues while the remainder was generated primarily by Personal Banking and Wealth Management.

Net interest income, on a taxable equivalent basis, reached $386 million versus $338 million for the corresponding quarter of 2001, for an increase of 14%. The excellent growth in net interest income was chiefly due to the improved spread in Personal Banking as well as revenues from asset/liability management.

Other income, on a taxable equivalent basis, amounted to $419 million as against $424 million for the first quarter of 2001, for a decrease of $5 million, mainly attributable to trading income and gains on securities.

Operating Expenses
Operating expenses for the first quarter of 2002 were $501 million compared to $477 million for the corresponding quarter of 2001. The efficiency ratio, or operating expenses as a percentage of total revenues, went from 62.6% in the first quarter of 2001 to 62.2% this quarter, owing mainly to the mix of revenue streams.

Assets
As at January 31, 2002, the Bank had total assets of $75.8 billion, or virtually unchanged from January 31, 2001 when assets stood at $75.2 billion. Loans and acceptances were down $4.7 billion, of which $3 billion was due to the sale of U.S. asset-based lending operations. Cash resources, securities and securities purchased under reverse repurchase agreements rose by $5 billion.

Savings
Total personal savings administered by the Bank stood at $64 billion as at January 31, 200, compared to $62 billion as at January 31, 2001.

Capital
Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, reached a record level of 11.1% and 15.0%, respectively, compared to 8.8% and 12.1% a year earlier. The improvement in the Tier 1 capital ratio was attributable to the $6.2 billion reduction in risk-weighted assets essentially due to the sale of U.S. commercial loans, the reduction in commitments to extend credit and the decline in market risk. In addition, Tier 1 capital rose close to $400 million owing to internally generated funds in spite of the redemption of Series 10 preferred shares totalling $92 million on November 16, 2001. Total capital also increased by almost $400 million.

On February 15, 2002, the Bank redeemed non-cumulative first preferred shares, Series 11, totalling $100 million. This transaction and the repurchase of up to 9.5 million common shares will reduce Tier 1 and total capital ratios by a maximum of approximately 100 basis points.

Dividends
At its meeting on February 28, 2002, the Board of Directors declared regular dividends on the various classes and series of preferred shares as well as a dividend of 24 cents per common share, payable on May 1, 2002 to shareholders of record on March 28, 2002.

For more information: