National Bank of Canada announces its results for the third quarter of 2002

Montreal, 29 August 2002 - 
  • Increased earnings for its business lines
  • Revaluation of an investment
  • Improved credit quality
  • 2.9 million common shares repurchased
  • Excellent capital ratios


National Bank of Canada declared income before goodwill charges of $26 million or 12 cents per share for the third quarter ended July 31, 2002, compared to $148 million or 73 cents per share for the corresponding quarter of 2001. During the quarter, the National Bank recorded an impairment charge of $112 million after taxes further to the revaluation of the Bank's investment in Cognicase Inc. The Bank acquired an interest in Cognicase Inc. when it sold SIBN Inc., its information technology subsidiary, in May 2000. Excluding this charge, income before goodwill charges would have been $138 million or 73 cents per share.

3QA2002

3Q2001

$ millions

Per share

Per share

Income before goodwill charges

26

$0.12

$0.73

Impairment charge

_ 112

_$0.61

____ -

138

$0.73

$0.73

The value assigned to the investment in Cognicase reflects a conservative assessment in view of current conditions in the technology sector. This adjustment to the book value of the investment in no way affects the Bank's business relationship with Cognicase, which remains the preferred supplier of information technology services to the Bank and its subsidiaries.

Commenting on the quarter's results, Réal Raymond, President and Chief Executive Officer, noted the increased earnings posted by each business line despite economic conditions that were unfavourable for growth in commercial loan volumes and the decline in market trading by retail investors. Compared to the third quarter of 2001, earnings were up by 5% at Personal Banking and Wealth Management, by 12% at Commercial Banking and by 11% at Financial Markets, Treasury and Investment Banking. Mr. Raymond also stressed the strong performance in personal banking operations and the quality of the loan portfolio.

The quality of the loan portfolio continued to improve. In fact, as at July 31, 2002, net impaired loans were down $32 million and allowances for credit losses exceeded gross impaired loans by $124 million compared to $92 million at the end of the previous quarter.

Tier 1 capital remained high at 10.2% of regulatory capital as at July 31, 2002 versus 10.7% as at April 30, 2002 and 9.6% as at October 31, 2001.

Business development

During the third quarter, the Bank undertook various initiatives designed to achieve its strategic objectives and carry out its business plan.

Specifically, on August 12, 2002, the Bank concluded its acquisition of mutual fund manager and distributor Altamira, a move which will enable it to strengthen its position in the strategic wealth management niche, one of the Bank's main growth targets. As indicated by Réal Raymond when the deal was announced, “this acquisition significantly expands the National Bank's presence in wealth management outside Quebec, doubles its mutual funds under management which now amount to over $10 billion, broadens its range of products and services, and increases its profitability.”

The Bank also continued to deploy its new Wealth Management business line in the third quarter. This specialized team fosters customer loyalty by offering personalized service adapted to the specific needs of wealthy and upscale clients, thereby further consolidating the Bank's position in the key niche of portfolio management.

In keeping with its strategy of providing superior customer service, the Bank further enhanced its product offering by becoming the first financial institution in Quebec to offer person-to-person payment through its Internet Banking Solutions service.

The Bank reaffirmed its commitment to the promising sector of electronic commerce when it changed the name of its ClicCommerce subsidiary to National Bank eCommerce. Through new partnerships, National Bank eCommerce has redefined and expanded its offering of e-commerce solutions that are customized to companies' needs.

With a view to further diversifying its distribution network, the Bank also signed a new service agreement with the Québec CMA Order which will enable the Order's 7,500 members to benefit from a financial package designed specially for the needs of professional associations.

"We remain committed to creating value for our shareholders,” Mr. Raymond stated, “by focussing on activities in sectors where the Bank has had proven success.”



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



Conference call on third-quarter results

- A conference call for financial analysts will be held on August 29, 2002 at 2:00 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 will be 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 September 5, 2002 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1230194.
- 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 third quarter and the nine months ended July 31, 2002.

Strategic Objectives

As indicated in the 2001 Annual Report, the National Bank set certain strategic objectives for itself for fiscal 2002 and subsequent years. The results obtained for the first nine months of 2002 include the impact of the provision for credit losses in the telecommunications sector taken in the second quarter.

Objectives

3Q 2002 Results 3T 2002*

9M 2002 Results*

Growth in earnings per share

4%-6%

- %

-3%

Return on common shareholders' equity

15%-17%

14.6%

14.2%

Efficiency ratio

61% in 2003

63.3%

61.6%

Tier 1 capital ratio

7.75%-8.75%

10.2%

10.2%


*excluding the impairment charge for an investment


Operating Results

In the third quarter of 2002, the Bank recorded an impairment charge of $137 million before taxes ($112 million after taxes) for an investment. This charge reduced earnings per share by 61 cents and return on common shareholders' equity by 12.3 percentage points for the quarter and by 4.1 percentage points for the nine months ended July 31, 2002.

Excluding the impairment charge, the National Bank posted income before goodwill charges of $138 million or 73 cents per share for the third quarter ended July 31, 2002 compared to $148 million or 73 cents per share for the corresponding quarter of 2001. Return on common shareholders' equity before goodwill charges was 14.6% versus 15.9% for the third quarter of 2001.

Income for the first nine months of fiscal 2002, before goodwill charges and excluding the impairment charge, was $406 million or $2.08 per share as against $435 million or $2.15 per share for the same period in 2001. Return on common shareholders' equity before goodwill charges was 14.2% for the period compared to 16.2% for the same period in 2001.


Results by Segment

Earnings for Personal Banking and Wealth Management amounted to $67 million for the third quarter of 2002, up 4.7% from the $64 million recorded for the corresponding period of 2001. Earnings for personal banking operations rose from $51 million in the third quarter of 2001 to $58 million this quarter, for an increase of 14%, whereas earnings for wealth management operations fell 31% to $9 million this quarter, down from $13 million a year earlier as a result of the decline in investor activity on the markets. Net interest income rose 2% to total $252 million. More favourable spreads on certain types of loans were partly offset by the narrower spread on transaction accounts. Other income for the quarter was $228 million compared to $234 million for the third quarter of 2001. The decline in income attributable to a slowdown in retail brokerage activity was only partially offset by an increase in insurance income. At $351 million, operating expenses for the quarter were down close to 1% from the $353 million recorded in the corresponding quarter of 2001. Expected loan losses for the quarter were $23 million compared to $22 million for the quarter ended July 31, 2001.

For the first nine months of fiscal 2002, earnings for Personal Banking and Wealth Management were $191 million as against $193 million for the same period in 2001.

Commercial Banking posted total earnings of $29 million in the third quarter, for a 12% increase over the $26 million recorded in the corresponding quarter of 2001. Third-quarter net interest income was $69 million compared to $72 million for the same period a year earlier. A 3% decline in loan volumes as well as narrower interest spreads accounted for the $3 million decrease in net interest income. Other income rose by $3 million to reach $39 million, chiefly because of fees on bankers' acceptances. Operating expenses, at $39 million for the quarter, fell almost 5% from the same period in 2001. Expected loan losses were $22 million for the quarter compared to $26 million for the corresponding quarter of 2001.

For the nine months ended July 31, 2002, earnings for Commercial Banking totalled $88 million as against $91 million for the same period in fiscal 2001.

Financial Markets, Treasury and Investment Banking recorded third-quarter earnings of $59 million, or an 11% increase over the corresponding quarter of 2001. Total revenues rose $22 million or 12%, to reach $210 million. The increase in revenues was primarily attributable to institutional operations at National Bank Financial. Operating expenses were $107 million this quarter compared to $94 million for the third quarter of 2001, for a 14% increase chiefly related to variable compensation. Expected loan losses were $9 million versus $8 million for the quarter ended July 31, 2001.


Earnings for Financial Markets, Treasury and Investment Banking for the first nine months of the fiscal year amounted to $202 million, up 35% from the $150 million recorded for the same period in 2001.

Revenues

Net interest income, on a taxable equivalent basis, was $358 million compared to $359 million for the corresponding quarter of 2001. Higher net interest income on credit card advances as well as an increase resulting from asset and liability matching activities were offset by a reduction attributable to transaction accounts and lower commercial and corporate loan volumes.
Excluding the impairment charge for an investment, other income, on a taxable equivalent basis, was $446 million versus $453 million for the third quarter of 2001. Trading revenues and gains on securities were down $18 million. However, this decrease was partially offset by higher capital market fees, securitization revenues and foreign exchange gains.


Operating Expenses

Operating expenses for the third quarter of 2002 were $508 million as against $503 million for the corresponding quarter of 2001, representing a 1% increase. Higher compensation expenses were in large part offset by lower expenses for computers and equipment.

Provision for Credit Losses and Impaired Loans

The provision for credit losses for the quarter was $62 million versus $130 million for the second quarter and $18 million for the quarter ended July 31, 2001. In the third quarter of 2001, loan losses were chiefly attributable to U.S. commercial lending activities which are now presented under discontinued operations.

As at July 31, 2002, allowances for credit losses exceeded impaired loans by $124 million compared to $92 million as at April 30, 2002, for an improvement of $32 million. At the end of fiscal 2001, net impaired loans stood at $91 million.

The ratio of gross impaired loans to total tangible capital and allowances remained excellent at 15.7% as at July 31, 2002 versus 15.9% as at April 30, 2002 and 22.4% as at October 31, 2001.

Assets

The Bank had total assets of $72.1 billion as at July 31, 2002 compared to $75.8 billion at the end of fiscal 2001. Loans and bankers' acceptances were down $2.9 billion primarily because of the sale of asset-based lending operations in the United States.

Savings

Total personal savings administered by the Bank amounted to $63.9 billion as at July 31, 2002 compared to $60.8 billion as at October 31, 2001. Savings administered by National Bank Financial accounted for three-quarters of the $3.1 billion increase. Bank deposits, which represent one-third of savings, have risen 2.7% since the beginning of the fiscal year.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 10.2% and 14.2% respectively as at July 31, 2002 compared to 10.7% and 14.5% as at April 30, 2002 and 9.6% and 13.1% as at October 31, 2001. In comparison to the previous quarter, the ratios declined primarily because of the repurchase of 2.9 million common shares under the normal course issuer bid.

The improvement in the ratios since October 31, 2001 was due to the reduction in risk-weighted assets, particularly following the sale of U.S. commercial lending operations.

Dividends
At its meeting on August 29, 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 November 1, 2002 to shareholders of record on September 26, 2002.

For more information:

Michel Labonté
Senior Vice-President
Finance and Technology
(514) 394-8610
Denis Dubé
Director
Public Relations
(514) 394-8644




Caution regarding forward-looking statements

As part of its analyses and reports, National Bank of Canada from time to time makes forward-looking statements concerning the economy, market changes, the achievement of strategic objectives, certain risks and other related matters.

By their very nature, such forward-looking statements involve inherent risks and uncertainties. It is therefore possible that express or implied projections contained in such statements will not materialize and will differ materially from actual future results. Such differences may be caused by factors which include, but are not limited to, changes in Canadian and/or global economic conditions, particularly fluctuations in interest rates, currencies and other financial instruments, market conditions, technological changes or regulatory developments.

Investors and others who base themselves on the Bank's forward-looking statements to make decisions should carefully consider the above factors as well as the uncertainties they represent and the risks they entail. The Bank therefore cautions readers not to place undue reliance on these forward-looking statements.

Third quarter 2002 (160K)

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