The National Bank announces record net income for the first quarter of fiscal 2003

• Net income of $166 million, an increase of 14%
• 32% growth in net income for Personal and Commercial
• Decrease in the provision for credit losses
• Tier 1 capital ratio of 10.2%
• Normal course issuer bid launched for the repurchase of 9.1 million common shares

MONTREAL, February 27, 2003 – National Bank of Canada declared net income of $166 million for the first quarter ended January 31, 2003, an increase of 14% compared to $146 million for the corresponding period of 2002. Earnings per share were $0.88 for the quarter versus $0.73 for the first quarter of 2002, up 21%. Return on common shareholders' equity was 17.6% for the first quarter of 2003 compared to 15.0% for the year earlier period.

This growth in quarterly net income, the largest in the Bank's history, was chiefly attributable to the 32% increase in net income for the Personal and Commercial segment. The 6% rise in revenues due to the wider spread and the growth in deposit volumes of individuals and small businesses accounted for the increase in this segment's net income.

Commenting on these results, Réal Raymond, President and Chief Executive Officer, focused on "the remarkable performance of banking activities with individuals and businesses. I am satisfied with the performance of the Bank's other segments given the uncertain capital market environment."

As at January 31, 2003, the specific and general allowances exceeded impaired loans by $175 million compared to $159 million as at October 31, 2002.

On January 31, 2003, the Bank issued $200 million of First Preferred Shares Series 15 with non-cumulative dividends and a fixed rate of 5.85%. On January 20, 2003, the Bank initiated a normal course issuer bid for the repurchase of up to 9.1 million common shares. As at January 31, 2003, 1.4 million shares had been repurchased for an aggregate consideration of $46 million.

Business Development

In the first quarter, the Bank took the following specific steps to better serve its customers and to develop new products.

In view of current market conditions and in order to meet the needs of customers looking for secure financial products during RRSP season, the National Bank introduced the Canadian Blue Chip Portfolio-Linked Note, a product with guaranteed principal. This new product, which is added to the Bank's other GICs, was extensively promoted both on television and in the branch network.

To further promote its line of financial products, the National Bank acquired the deposit portfolio of Standard Life Trust Company. The National Bank will be managing this $38.4 million portfolio and more than 300 independent brokers will be renewing these deposit certificates with the Bank.

Always looking for ways to create added value for its customers, the National Bank signed an agreement with Workopolis, a leader in recruitment and job search solutions. Workopolis offers the Bank's business customers ad placement services through the Bank's Internet Banking Solutions portal. With these services, customers can save time and reduce their recruitment costs.

Lastly, after a selection process, the National Bank announced last December that BOS had been chosen as its new advertising agency. As such, BOS will help the Bank prepare and carry out its marketing strategies and advertising campaigns.

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 first quarter of fiscal 2003

• A conference call for financial analysts will be held on February 27, 2003 at 12:30 p.m. Eastern time.
• Access by telephone: 1-800-387-6216 or (416) 405-9328.
• The conference call will be webcast live at www.nbc.ca/investorrelations.
• The Report to Shareholders, 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 March 6, 2003 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1373037.
• 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 of 2003.

Strategic Objectives

The National Bank published in its 2002 Annual Report the strategic objectives which it set for itself for fiscal 2003. The table below compares these objectives to the results for the first quarter of 2003.

*Based on the earnings per share of the last four quarters excluding the impairment charge for an investment

Analysis of Results

Operating Results

For the first quarter ended January 31, 2003, the National Bank earned net income of $166 million, an increase of 14% compared to $146 million for the first quarter of 2002. Earnings per share were $0.88 for the quarter versus $0.73 for the corresponding period of 2002, up 21%. Return on common shareholders' equity rose to 17.6% for the first quarter of 2003 compared to 15.0% for the quarter ended January 31, 2002.

Revenues

Total income for the first quarter of 2003 was $835 million, up 10% compared to $762 million for the year earlier period.

Net interest income amounted to $355 million in the first quarter of 2003 versus $381 million for the corresponding period of 2002. Of the $26 million decrease, $21 million was attributable to the Financial Markets segment, in particular, due to asset and liability matching operations that had benefitted from a favourable interest rate environment in the first quarter of 2002 and lower corporate loan volumes. Net interest income for the "Other" heading was down $11 million primarily due to the cost of financing the acquisitions made during fiscal 2002. On the other hand, net interest income for Personal and Commercial rose 4% to reach $312 million. The increase was mainly due to the spread which widened from 3.06% in the first quarter of 2002 to 3.23% this quarter.

Other income for the quarter totalled $480 million compared to $381 million for the first quarter of 2002, for an increase of $99 million or 26%. The acquisitions of Putnam Lovell and Altamira contributed $20 million and $16 million, respectively, to the growth in other income. The gain generated by the initial public offering of The Toronto Stock Exchange, less the loss on the investment in Cognicase Inc. after it was acquired by CGI, added approximately $21 million to other income. Lastly, other income for Personal and Commercial activities grew by $15 million or approximately 11%.

Operating Expenses

Operating expenses for the first quarter of 2003 amounted to $548 million versus $501 million for the corresponding period of 2002. The acquisitions of Putnam Lovell and Altamira added $33 million to operating expenses compared to the same quarter of 2002. If the impact of the acquisitions is excluded, the increase in operating expenses was $14  million or 2.8% compared to the first quarter of 2002.

Results by Segment

The revenues of each segment are presented on a taxable equivalent basis, i.e., they are grossed up to make the income earned on certain securities comparable with income from other financial instruments. An equivalent amount was added to income taxes. 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 and Commercial

Personal and Commercial posted net income of $91 million for the first quarter of 2003, up 32% from $69 million for the corresponding period in 2002. Revenues were $468 million, for an increase of $28 million or 6%. Net interest income rose $13 million owing mainly to the improved interest margin which reached 3.23% for the first quarter of 2003 as against 3.06% for the same period a year earlier. The average volume of loans and acceptances was down by approximately $400 million primarily due to commercial loans. The average volume of deposits however was up by more than $1 billion. At $273 million, operating expenses for the quarter remained relatively unchanged from the first quarter of 2002. The efficiency ratio improved, going from 62.3% in the first quarter of 2002 to 58.3% this quarter. Lastly, expected loan losses declined by $5 million or 9% from the corresponding period in 2002, thereby reflecting the improved quality of the loan portfolio.

Wealth Management

Net income for the Wealth Management segment totalled $19 million, down $4 million over the first quarter of the previous year. Revenues amounted to $162 million this quarter compared to $160 million for the same period in 2002. The additional $16 million in revenues from Altamira was largely offset by lower revenues from retail brokerage activities. At $131 million, operating expenses were up $7 million primarily because of the addition of expenses at Altamira.

Financial Markets

For the first quarter of 2003, Financial Markets posted net income of $64 million for a 12% increase. Revenues for the quarter reached $237 million, for an increase of $40 million or 20%, which was mainly attributable to an additional $20 million in revenues from Putnam Lovell and a $26 million gain from the initial public offering of The Toronto Stock Exchange. These increases were partly offset by lower revenues from asset and liability matching, as well as the lower volume of corporate loans. At $128 million, operating expenses rose $35 million mainly as a result of variable remuneration and the Putnam Lovell acquisition. Expected loan losses were $10 million for the first quarter of 2003 compared to $13 million for the same period a year earlier.

Other

Revenues from the "Other" heading, excluding securitization operations and the cost of financing acquisitions, included the $4.4 million write-down of an investment in Cognicase following CGI's acquisition of this company. 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 favourable $196 million difference was primarily attributable to the revision of the estimated allowance of $185 million recorded in the first quarter of 2002. Discontinued operations showed a net gain of $118 million further to the sale of asset-based lending operations in the United States in the first quarter of 2002.

Risk Management

Credit Risk

The provision for credit losses for the quarter was $41 million as against $245 million for the corresponding quarter of 2002. Excluding the revision of the estimated allowance of $185 million recorded in the first quarter of 2002, the provision for credit losses was reduced by $19 million.

As at January 31, 2003, allowances for credit losses exceeded impaired loans by $175 million compared to $159 million as at October 31, 2002, for an improvement of $16 million. New formations of gross impaired loans (less recoveries) amounted to $29 million for the quarter compared to $17 million for the previous quarter.

The ratio of gross private impaired loans to total tangible capital and allowances improved to 12.7% as at January 31, 2003 versus 14.1% as at October 31, 2002.

Market Risk – Trading Activities

The VaR (Value-at-Risk) simulation model is one of the main tools used in managing the market risks associated with trading activities. The VaR measure is based on a 99% confidence level and uses two years of historical data for its computation. Effective November 1, 2002, the Bank started using two years of data instead of three years. No material change in VaR behaviour was observed following this change. Market risk management is described in greater detail on page 49 of the 2002 Annual Report.

The table below illustrates the distribution of market risks by type of risk, namely, interest rate, foreign exchange and price risk, including commodity and equity risk.

Trading Activities(1)

(1) Amounts are presented on a pre-tax basis and represent one-day VaR.
(2) Global VaR reflects the correlation effect from each of the risk categories through diversification.

Balance Sheet

As at January 31, 2003, the Bank's total assets amounted to $73.1 billion as against $74.6 billion as at October 31, 2002 and $76.0 billion as at January 31, 2002. The table below presents the changes to the balances of the main loan and deposit headings.

*Including securitized assets

Residential mortgage loans totalled $17.5 billion as at January 31, 2003, up 2% from last year. Credit card receivables advanced 11% over one year to reach $1.5 billion as at January 31, 2003. Loans to businesses amounting to $15.4 billion were down $1.2 billion owing chiefly to corporate and international loans. Since October 31, 2002, the loan portfolio has remained relatively stable.

Personal deposits rose by more than $600 million over one year and by nearly $400 million since October 31, 2002 for a total of $23 billion at the end of the quarter. Off-balance sheet savings administered by the Bank and its subsidiaries grew by $4.9 billion since January 31, 2002, primarily because of the acquisition of Altamira. As at January 31, 2003, commercial deposits were approximately $1 billion higher than as at January 31, 2002 and as at October 31, 2002 owing mainly to deposits from small and medium-size businesses.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 10.2% and 14.3% respectively as at January 31, 2003 compared to 9.6% and 13.6% as at October 31, 2002. The improvement in capital ratios was chiefly owing to the issue of $200 million of preferred shares.

Dividends

 At its meeting on February 27, 2003, 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 May 1, 2003 to shareholders of record on March 27, 2003.

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.

About National Bank of Canada

National Bank of Canada is an integrated group which provides comprehensive financial services to consumers, small and medium-sized enterprises and large corporations in its core market, while offering specialized services to its clients elsewhere in the world. The National Bank offers a full array of banking services, including retail, corporate and investment banking. It is an active player on international capital markets and, through its subsidiaries, is involved in securities brokerage, insurance and wealth management as well as mutual fund and retirement plan management. The National Bank has assets of about $75 billion and, together with its subsidiaries, employs over 17,000 people. The Bank's securities are listed on the Toronto Stock Exchange (NA:TSX). For more information, visit the Bank's website at www.nbc.ca.

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 First quarter 2003 (518K)

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