The National Bank announces its results for the fourth quarter and fiscal 2002

• Strong income growth in Personal Banking and Wealth Management and in Commercial Banking
  
• Excellent credit quality
  
• Dividend increase of 8%

See "Reconciliation of reported net income to adjusted net income" in appendix.

National Bank of Canada declared income before goodwill charges of $135 million or 71 cents per share for the fourth quarter ended October 31, 2002, compared to $147 million or 73 cents per share for the corresponding quarter of 2001. In the fourth quarter of 2001, the Bank sold its merchant payment solutions, thereby generating a gain (taxable equivalent basis) of $76 million ($47 million after income taxes). Excluding this item, as well as discontinued operations in each quarter of 2001 and 2002 and certain other adjustments described in the above table of fourth quarter results, income totalled $146 million in the fourth quarter of 2002, up 26% from the corresponding quarter of 2001.

Return on common shareholders' equity, once adjusted, rose to 15.7% in the fourth quarter of 2002 versus 11.9% for the same period last year.

This increase in adjusted quarterly income was attributable to the $45 million decrease in the provision for credit losses ($28 million after income taxes) as well as the higher adjusted income(1) in Personal Banking and Wealth Management (+22%) and Commercial Banking (+11%).

Moreover, the Board of Directors of the Bank approved an increase in dividends of 8%, or 2 cents per share, thereby raising the quarterly dividend to 26 cents per share.

Fiscal 2002

For fiscal 2002, income before goodwill charges amounted to $429 million or $2.18 per share compared to $582 million or $2.88 per share in 2001. Taking into account the one-time adjustments described below, adjusted income stood at $555 million in 2002, or 96% of adjusted income(1) in 2001. Adjusted earnings per share of $2.86 in 2002 are comparable to the adjusted earnings per share of $2.87 in 2001. Taking the adjustments into account, return on common shareholders' equity was 14.7% in 2002 as against 15.9% in 2001.

(1)Adjusted income for Personal Banking and Wealth Management excludes the decline in the value of investments and the write-off of fixed assets totalling $7 million, after income taxes.

See "Reconciliation of reported net income to adjusted net income" in appendix.

In addition, the total return to shareholders was 25% in fiscal 2002 while the S&P/TSX index for banks and trusts rose only 4% for the same period.

As at October 31, 2002, the quality of credit was still excellent as demonstrated by the level of the allowance for credit losses which exceeded gross impaired loans by $159 million compared to a $124 million surplus in the allowance for credit losses as at July 31, 2002 and a net balance of impaired loans of $91 million a year earlier.

Réal Raymond, President and Chief Executive Officer, stated that the Bank's performance was satisfactory in light of the difficult economic environment. In fact, while results for fiscal 2002 fell short of expectations, they nevertheless compared favourably with those of the banking industry. According to Mr. Raymond, "The relevance of the strategies pursued by the Bank to achieve its business plan is confirmed by these generally satisfactory results. In the past year, we adopted concrete measures to respect our commitment of focusing on high-potential markets in addition to substantially improving the quality of our lending portfolio."

Business Development

In the fourth quarter, the Bank took specific action to continue its expansion and strengthen its position in certain strategic markets.

The Bank recently signed an important agreement with Investors Group, Great-West Life and London Life for the distribution of its banking products and services. These three firms, all industry leaders in their respective markets, serve a total of 3.2 million clients through more than 7,000 advisors across the country. Mr. Raymond pointed out that this partnership "gives us access to the largest network of financial advisors in Canada and supports our plans to broaden our reach geographically."

In the Wealth Management sub-segment, the Bank continued to ensure the smooth integration of mutual fund manager and distributor Altamira. Special teams were also formed to take advantage of all the business opportunities arising from this important transaction, which was finalized in August.

In a move to expand its product offering, the Bank launched the Strategic Yield Class fund, a new fund geared to businesses and wealthy individuals. This fund offers the security and liquidity of a short-term investment while generating income that receives advantageous tax treatment. In addition, the Bank has continued to support the development of small and medium-sized businesses by offering them two new business solutions: the Foreign Currency product that allows exchange rates to be reserved online, and software co-developed with Opendesk, with which the Bank has signed a partnership agreement and which provides access to a host of leading-edge management applications.

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

Conference call on results for the fourth quarter and fiscal 2002

A conference call for financial analysts will be held on December 5, 2002 at 2 p.m. Eastern time.

Access by telephone: 1-800-273-9672 or (416) 695-5806.

The conference call will be webcast live via Internet at www.nbc.ca/investorrelations.

The press release, 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 December 12, 2002 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1307480.

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 interim consolidated financial statements for the fourth quarter and for the fiscal year ended October 31, 2002. Revenues are presented on a taxable equivalent basis, which means that they have been grossed up in order to bring tax-exempt income earned on certain securities in line with income earned on other financial instruments. An equivalent amount has been added to income taxes. In addition, for analysis purposes, an adjusted income is presented which excludes items that, in management's opinion, should not be taken into account when analyzing the Bank's performance. The adjusted income is not based on Canadian generally accepted accounting principles (GAAP) and may not be comparable to another company's adjusted income. A reconciliation of reported net income to adjusted net income is appended.

Strategic Objectives

At the beginning of the year, the National Bank set strategic objectives for itself for fiscal 2002. The results obtained include the impact of the provision for credit losses in the telecommunications sector taken in the second quarter, but exclude the impairment charge for an investment:

*Excluding the impairment charge for an investment
**See Reconciliation of reported net income to adjusted net income in appendix

Operating Results

Income for the fourth quarter of 2002, before goodwill charges, totalled $135 million or 71 cents per share compared to $147 million or 73 cents per share for the corresponding quarter of 2001. Adjusted income for the fourth quarter of 2002 amounted to $146 million or 77 cents per share, up 26% from the $116 million or 56 cents per share for the same period in 2001.

For fiscal 2002, income before goodwill charges was $429 million or $2.18 per share as against $582 million or $2.88 per share in 2001. As presented in the appendix, income adjusted for one-time events in 2002 would be $555 million or $2.86 per share compared to an adjusted income of $580 million or $2.87 per share in 2001. The 4% decline in adjusted income was mainly attributable to an increase in this year's provision for credit losses. The rise in loan losses was partially offset by the strong performance of Financial Markets, Treasury and Investment Banking while the other lines of business posted relatively stable results in 2002 compared to 2001. The smaller difference in adjusted earnings per share ($2.86 in 2002, $2.87 in 2001) was primarily due to the repurchase of 9.5 million common shares under the normal course issuer bid, which was completed in October.

The adjusted return on common shareholders' equity went from 15.9% in 2001 to 14.7% in 2002 as a result of the decrease in income on the one hand and the increase in average common shareholders' equity on the other.

Results by Segment

The revenues of each line of business are presented on a taxable equivalent basis. In addition, the provision for credit losses of each operating segment is based on expected losses which are calculated using statistical analyses. The difference between expected losses and actual losses is charged to the "Other" heading.

Personal Banking and Wealth Management

Personal Banking and Wealth Management posted earnings of $55 million for the fourth quarter of 2002, up 8% from $51 million for the corresponding period in 2001. During the quarter, a $2 million impairment charge was recorded for the mutual funds held by the Bank. In addition, deferred charges and fixed assets totalling $9 million were written off for e-commerce activities. Excluding these charges, earnings for the sector would have been $62 million, for an increase of 22%.

Earnings for the Personal Banking sub-segment, excluding the write-off of deferred charges and fixed assets, rose 16% to $51 million in the fourth quarter of 2002 compared to $44 million in the corresponding quarter of 2001. Insurance activities generated almost half of the growth, with Card Services and branch banking operations responsible for the remainder.

During the fourth quarter, earnings for the Wealth Management sub-segment grew by 50% over the corresponding period of 2001 to reach $11 million (excluding the decline in the value of mutual funds). The addition of Altamira since the middle of August and earnings from trust activities accounted for most of the increase, while the contribution of Individual Investor Services at National Bank Financial was more modest during the fourth quarter because of lower transaction volumes.

For fiscal 2002, Personal Banking and Wealth Management posted total earnings of $246 million as against $244 million in 2001. Excluding the adjustments in the last quarter of 2002, the sector's earnings totalled $253 million, up 4% over the previous fiscal year. The 10% growth in personal banking operations (excluding the write-off of certain assets) was partially offset by the underperformance of Wealth Management which was primarily caused by the decline in income from brokerage activities.

Revenues for Personal Banking and Wealth Management were $494 million for the fourth quarter of 2002 compared to $474 million for the corresponding period in 2001, for an increase of 4%. For fiscal 2002, revenues totalled $1,934 million as against $1,911 million in the previous year. The decline in revenues at Individual Investor Services of National Bank Financial was offset by an increase in revenues from insurance activities and the addition, during the fourth quarter, of $16 million in revenues from Altamira. The sector's operating expenses were $383 million for the fourth quarter of 2002 compared to $365 million for the same quarter of 2001. Operating expenses for the year went from $1,420 million in 2001 to $1,452 million in 2002. If the $9 million write-off of deferred charges and fixed assets in the fourth quarter is excluded, operating expenses for the year would have risen by less than 2%. The efficiency ratio, excluding non-recurring items, remained relatively stable at 74.5% as against 74.3% in 2001. Expected losses for fiscal 2002 totalled $97 million, or essentially the same as the $98 million recorded last year.

Commercial Banking

Commercial Banking posted fourth-quarter earnings of $31 million, for an 11% increase over the $28 million recorded for the corresponding period in 2001. The growth in earnings was attributable to the $6 million or 23% decline in expected loan losses, which reflected the decrease in volumes and the improvement in the quality of business loans. Operating expenses were $37 million for the fourth quarter of 2002, down $3 million or almost 8% compared to the same period in 2001. Revenues for the quarter declined approximately 5% to $106 million as against $111 million for the corresponding quarter of 2001, due to lower loan volumes resulting from weaker demand.

For fiscal 2002, earnings for Commercial Banking were $119 million, or relatively unchanged from 2001. Revenues totalled $425 million, down less than 2% chiefly attributable to net interest income which was affected by the $400 million decline in loan volumes and which was partially offset by a slightly wider spread. Operating expenses stood at $153 million, or almost the same level as in the previous year. Expected loan losses fell by 6% from $88 million in 2001 to $83 million this year.

Financial Markets, Treasury and Investment Banking

Financial Markets, Treasury and Investment Banking recorded fourth-quarter earnings of $48 million for an 11% decline from the $54 million posted in the corresponding quarter of 2001. Revenues for the quarter totalled $207 million, for an increase of $13 million or 7%, chiefly because of the additional $26 million in income from Putnam Lovell NBF, which was acquired in June. However, lower trading income was partially offset by income from asset and liability management. Operating expenses for the quarter were $124 million, up $28 million primarily owing to the inclusion of Putnam Lovell's expenses.

For fiscal 2002, Financial Markets, Treasury and Investment Banking turned in a strong performance, earning income of $250 million for a 23% year-over-year increase. At $861 million, revenues rose 17% particularly because of asset and liability matching operations and revenues from National Bank Financial's institutional operations, including Putnam Lovell. Operating expenses for the year were $431 million, for a $65 million increase over fiscal 2001. Close to 60% of this increase was attributable to operating expenses at Putnam Lovell. Expected loan losses for the segment remained stable at $31 million in 2002 versus $32 million in 2001.

Other

In addition to securitized operations, revenues from the "Other" heading included a gain of $76 million on the sale of merchant payment solutions in 2001, while in 2002 revenues were reduced by a $137 million write-down of an investment. The provision for credit losses for the "Other" heading included the difference between expected losses charged to operating segments and actual loan losses incurred. The $292 million difference in the provision for 2002 compared to 2001 arose primarily from the revision of the estimated allowance of $185 million recorded in the first quarter, the $120 million loss on a telecommunications sector loan and the $30 million reversal of the general allowance for credit risk. Discontinued operations showed a net gain of $111 million further to the sale of asset-based lending operations in the United States. In 2001, commercial operations in the United States had posted a loss of $45 million.

Revenues

Net interest income on a taxable equivalent basis totalled $368 million in the fourth quarter of 2002, up 8% over the $340 million recorded in the corresponding quarter of 2001. For fiscal 2002, net interest income rose $84 million or 6% to $1,473 million. The increase in net interest income was chiefly attributable to asset and liability matching and, to a lesser extent, the spread on credit card advances owing to the decline in financing costs. However, narrower spreads on transaction deposits, as a result of lower rates, were offset by higher deposit volumes and wider spreads on loans to individuals and small businesses.

Other income for the quarter amounted to $447 million as against $535 million in the fourth quarter of 2001, when the Bank realized a $76 million gain on the sale of its merchant payment solutions. Excluding the gain in 2001 and the impairment charge on investments in the fourth quarter of 2002, the $10 million drop in other income was attributable to the slowdown in trading activities, lower retail brokerage revenues and loss of income following the sale of merchant payment solutions. These declines were, however, reduced by the addition of income from Putnam Lovell and Altamira.

Other income for fiscal 2002 reached $1,641 million compared to $1,858 million in 2001. Not including special items (impairment charge on investments in 2002 and gain on the sale of operations in 2001), other income remained relatively stable at $1,780 versus $1,782 in 2001. Other income was up because of the acquisition of Putnam Lovell and Altamira, the rise in insurance income and the strong performance of institutional operations at National Bank Financial. However, these increases were completely offset by the sale of merchant payment solutions, the slowdown in retail brokerage activity and the decline in trading income.

Operating Expenses

Operating expenses for the fourth quarter of 2002 were $540 million as against $506 million in the corresponding quarter of 2001. Excluding the write-off of $9 million in deferred expenses and fixed assets, operating expenses would have risen by $25 million. The addition of $37 million in expenses for Altamira and Putnam Lovell was in part offset by efforts to cut costs.

For fiscal 2002, operating expenses represented $2,040 million compared to $1,989 million in 2001. Of the $51 million increase, $9 million was attributable to the write-off of deferred expenses and fixed assets, $38 million to the addition of Putnam Lovell and $10 million to the addition of Altamira.

Provision for Credit Losses and Impaired Loans

The provision for credit losses for the quarter was $53 million versus $98 million for the corresponding quarter a year earlier. For fiscal 2002, the provision for credit losses amounted to $490 million as against $205 million in 2001. The $185 million provision recorded to adjust the estimated allowance for impaired loans in the first quarter and the $120 million loss on a credit in the telecommunications sector accounted for most of the increase.

As at October 31, 2002, allowances for credit losses exceeded impaired loans by $159 million compared to $124 million as at July 31, for an improvement of $35 million. During the quarter, gross impaired loan formation amounted to only $17 million (net of recoveries). 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 14.1% as at October 31, 2002 versus 15.7% as at July 31, 2002 and 22.5% as at October 31, 2001.

Balance Sheet

The Bank had total assets of $74.6 billion as at October 31, 2002 compared to $76 billion a year earlier. Loans and bankers' acceptances were down $2.5 billion primarily because of the sale of asset-based lending operations in the United States. Cash resources and securities rose by $3.1 billion while securities purchased under repurchase agreements declined by $1.7 billion. On the liabilities side, personal deposits stood at $22.6 billion for a year-over-year increase of 3.4%. The table below presents the changes in average volumes of the main loan and deposit headings. As shown in the table, the Bank increased its volume of loans with a generally lower risk.

* Including securitized assets

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 9.6% and 13.6% respectively as at October 31, 2002 compared to 10.2% and 14.2% as at July 31, 2002, and 9.6% and 13.1% as at October 31, 2001. In comparison to the previous quarter, the decline in the ratios was chiefly attributable to goodwill from the acquisition of Altamira.

The improvement in the ratios since October 31, 2001 which was due to the reduction in risk-weighted assets, particularly following the sale of U.S. asset-based lending operations, was offset by goodwill from the acquisition of Altamira.

Dividends

At its meeting on December 5, 2002, the Board of Directors declared regular dividends on the various classes and series of preferred shares as well as a dividend of 26 cents per common share, payable on February 1, 2003 to shareholders of record on December 26, 2002.

For more information:

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.

Fourth quarter 2002 (256K)

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