Record net income for the first quarter of 2004

Montreal, 26 February 2004 - 
  • Net income up 12% to $186 million
  • Earnings per share up 17% to $1.03
  • Return on common shareholders' equity of 19.0%
 

For the quarter ended
January 31

 

Net income

2004

2003

%

Personal and Commercial

104

94

+ 11

Wealth Management

24

19

+ 26

Financial Markets

72

64

+ 13

Other

(14)

(11)

 

Total

186

166

+ 12

Earnings per share

$1.03

$0.88

+ 17

Return on common shareholders' equity

19.0%

17.6%

   

National Bank of Canada earned record net income of $186 million in the quarter ended January 31, 2004 compared to $166 million in the corresponding quarter of 2003. Earnings per share amounted to $1.03 in the first quarter versus $0.88 in the same period of 2003, for a 17% increase. Return on common shareholders' equity was 19.0% for the quarter, in comparison to 17.6% for the quarter ended January 31, 2003.

In accordance with a new accounting standard that came into effect on November 1, 2003, National Bank has discontinued amortizing fees for mortgage loan prepayments. The unamortized balance of $25 million as at October 31, 2003 ($16 million net of income taxes) was recorded to income, adding $0.09 to the quarter's earnings per share.

Moreover, in the first quarter of 2004, the Bank recorded a $31 million impairment charge ($20 million net of income taxes) on corporate investments, which reduced earnings per share by $0.11.

Net income was up sharply for each of the Bank's three operating segments in the first quarter of 2004.

"We achieved these results by strengthening a number of performance drivers in recent years," stated Réal Raymond, President and Chief Executive Officer. "Our strategy was deployed using a disciplined, conscientious and professional approach and this growth is proof that all the Bank's components are doing well."

The Personal and Commercial Banking segment declared net income of $104 million for the first quarter of 2004, for an increase of $10 million or 11% compared to the same period in 2003. This growth was attained despite the Bank's ongoing investments under partnership programs. The improvement in segmented net income was mainly due to lower credit losses.

Increase transactions by individual investors on financial markets lifted net income at Wealth Management. For the first quarter of 2004, this segment recorded net income of $24 million, up 26% over the corresponding period of 2003. According to Mr. Raymond, "the winning formula is to serve the investor community efficiently and professionally while offering appropriate, results-oriented investment solutions."

Net income for the Financial Markets segment climbed 13% to $72 million in the first quarter of 2004 compared to $64 million for the same quarter of last year. Trading activities and corporate lending income helped fuel growth. "Our success in attracting highly talented people and building a diversified portfolio of activities enabled us to capitalize on market opportunities as they arose," said Mr. Raymond.

As at January 31, 2004, specific and general allowances for credit risk exceeded gross impaired loans by $171 million versus $154 million as at October 31, 2003. The reduction in impaired loans was concentrated mainly in the corporate lending sector.

Tier 1 and total capital ratios were 10.1% and 13.8%, respectively, as at January 31, 2004, in comparison to 9.6% and 13.4% as at October 31, 2003.

The Bank repurchased 1.6 million common shares for cancellation as at January 31, 2004 under the normal course issuer bid for the repurchase of up to 8.7 million common shares.

"We intend to stay the course during the coming quarters by focusing on the orientations that have delivered convincing results. National Bank is well on the way to achieve all the strategic objectives it had set for fiscal 2004."

 

Objectives

Results 1st Quarter 2004

Growth in earnings per share

5% - 10%

17%

Return on common shareholders' equity

15% - 17%

19.0%

Tier 1 capital ratio

8.75% - 9.50%

10.1%

Dividend payout ratio

35% - 45%

33%


MANAGEMENT'S DISCUSSION AND ANALYSIS OF 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 2004.

Analysis of Results

Operating Results

National Bank posted a record net income of $186 million for the first quarter ended January 31, 2004 compared to $166 million for the corresponding period in 2003. Earnings per share were $1.03 for the quarter, up 17% from $0.88 for the same quarter a year earlier. Return on common shareholders' equity stood at 19.0% for the quarter versus 17.6% for the quarter ended January 31, 2003.

On November 1, 2003, the Bank began applying the new accounting standard that establishes standards for financial reporting in accordance with generally accepted accounting principles. The introduction of this standard eliminates certain practices that could have been used within a particular industry. The only major impact on the Bank's results was that mortgage loan prepayment fees are no longer amortized. The unamortized balance of $25 million as at October 31, 2003 ($16 million net of income taxes) was recorded under "Lending fees" in the Consolidated Statement of Income. This adjustment added $0.09 to earnings per share for the quarter.

Results by Segment

Effective fiscal 2004, the Bank decided to measure the results of its operating segments in terms of actual losses rather than expected losses. Prior year figures have been restated to comply with the current year presentation.

Personal and Commercial

Quarterly net income for the Personal and Commercial segment amounted to $104 million, up 11% from the $94 million recorded for the same period in 2003. This improvement was primarily attributable to the 29% decrease in the provision for credit losses. In fact, credit losses for the period totalled $29 million compared to $41 million for the first quarter of 2003.

At $323 million, net interest income rose $11 million, or 3.5%, as the spread inched up from 3.23% in the first quarter of 2003 to 3.25% this quarter. Other income grew by $4 million to $160 million, primarily because of the higher volume of payments and foreign exchange revenue.

Operating expenses for the quarter were $292 million as against $279 million for the same period a year earlier. Approximately 30% of the increase was attributable to costs related to developing partnership programs, particularly IT development expenses. Excluding these costs, operating expenses would have been about 3% higher.

Wealth Management

During the first quarter of 2004, individuals continued to participate on financial markets, which boosted net income of Wealth Management segment to $24 million for the quarter from $19 million for a 26% year-over-year increase.

Total revenues grew close to 15%, from $162 million in the first quarter of 2003 to $186 million this quarter. The increase stemmed primarily from brokerage activities, but also from mutual fund revenues.

Operating expenses in the first quarter of 2004 reached $148 million, up from $131 million for the same period in 2003. Seventy per cent of the increase was attributable to variable compensation.

Financial Markets

The Financial Markets segment posted $72 million in net income for the first quarter of 2004, up 13% from $64 million for the corresponding quarter in 2003.

Revenues, totalling $268 million for the quarter, increased by $31 million, or 13%, mainly because trading revenues were $21 million higher and financial market fees were up $10 million.

 

Q1 2004

Q1 2003

Trading Revenues

   

(millions of dollars)

   

Financial Markets

   

Interest rate

46

22

Equities

25

31

Commodity and currency

13

10

 

84

63

Other segments

2

3

Total

86

66

     

Net interest income

(70)

16

Other income

160

39

Taxable equivalent

(4)

11

Total

86

66

At $132 million, operating expenses rose 3% from $128 million for the same quarter in 2003.

The provision for credit losses amounted to $24 million for the quarter compared to $10 million for the same period last year because of specific provision for credit losses recorded in the steel industry.

Other

The net loss for the "Other" heading totalled $14 million for the first quarter of 2004 compared to a net loss of $11 million for the same period in 2003.

Other income included an amount of $25 million now that fees charged on mortgage prepayments are no longer being amortized. The Bank also recorded a $31 million write-down in the value of investments.

Consolidated Results

Revenues

Total revenues in the first quarter of 2004 stood at $913 million compared to $835 million in the same quarter of 2003, for a $78 million or 9% increase. Trading revenues, as shown in previous table, were up $20 million and accounted for one quarter of revenue growth. The higher volume of individual trading on financial markets together with the corporate banking transactions contributed to the 21% growth in financial market fees, which amounted to $164 million for the quarter. At $76 million for the quarter, lending fees rose $26 million primarily because the unamortized balance of mortgage prepayment fees was recorded to income further to the application of a new accounting standard. Lastly, $7 million of losses on investment account securities included the $31 million impairment charge recorded on investments, which was largely offset by gains in the investment account at Treasury.

Operating Expenses

Operating expenses for the quarter were $579 million compared to $548 million in the same quarter of 2003. Of the $31 million increase, more than 40% stemmed from higher variable compensation as a result of the growing volume of retail brokerage activities. Excluding the increase in variable compensation, operating expenses were up 3% from the corresponding quarter of 2003. Overall, the efficiency ratio dipped from 63.7% for the first quarter of 2003 to 62.7% this quarter.

Risk Management

Credit Risk

The provision for credit losses for the quarter was $44 million as against $41 million for the corresponding quarter of 2003. Credit losses of Personal and Commercial segment were down $12 million or 29% to $29 million. However, at Financial Markets, the provision for credit losses rose from $14 million to $24 million in the first quarter of 2004.

As at January 31, 2004, allowances for credit losses exceeded impaired loans by $171 million, compared to $154 million as at October 31, 2003 and $175 million at the end of the corresponding quarter of 2003. Corporate banking was chiefly responsible for the reduction in impaired loans since the beginning of fiscal 2004.

The ratio of gross private impaired loans to total tangible capital and allowances was excellent at 12.9% as at January 31, 2004 versus 13.0% as at October 31, 2003 and 12.7% as at January 31, 2003.

Market Risk – Trading Activities

The VaR (Value-at-Risk) method is one of the main tools used in managing trading-related market risk. The VaR measure is based on a 99% confidence level and uses two years of historical data for its computation. Market risk management is described in more detail on page 59 of the 2003 Annual Report.

The table below entitled "Trading Activities" illustrates the allocation of market risk by type of risk: interest rate, foreign exchange, commodity and equity price.

Trading Activities (1)

(millions of dollars)

Global VaR by risk category

For the quarter ended
January 31, 2004

For the quarter ended
October 31, 2003

 

Period end

High

Average

Low

Period end

High

Average

Low

Interest rate

(4)

(7)

(5)

(3)

(4)

(5)

(4)

(3)

Foreign exchange

(1)

(2)

(1)

-

(1)

(2)

(1)

-

Equities

(2)

(4)

(2)

(1)

(2)

(3)

(2)

(1)

Commodities

-

-

-

-

-

-

-

-

Correlation effect (2)

3

7

3

-

3

4

4

1

Global VaR

(4)

(6)

(5)

(4)

(4)

(6)

(3)

(3)


(1) Amounts are presented on a pre-tax basis and represent one-day VaR.
(2) The correlation effect is the result of the diversification of types of risk.

Balance Sheet

The Bank's total assets stood at $80.8 billion as at January 31, 2004 compared to $82.4 billion at the end of fiscal 2003. The decline was attributable to cash and securities, which went from $33.1 billion as at October 31, 2003 to $31.5 billion at the end of the first quarter of 2004. The table below presents the main loan and deposit headings.

Average monthly volumes

January

October

(millions of dollars)

2004

2003

Loans and acceptances*

   

Residential mortgages

18,308

18,105

Consumer loans

5,355

5,193

Credit card receivables

1,597

1,525

Business loans

17,860

18,143

 

43,120

42,966

Deposits

   

Personal (balance)

23,853

23,512

Off-balance sheet personal savings (balance)

55,109

51,525

Business

10,359

10,533


*including securitized assets

As at January 31, 2004, residential mortgages totalled $18.3 billion, up approximately $200 million from October 31, 2003. Excluding indirect loans, consumer loans have risen by 4% since the beginning of the fiscal year to $4.9 billion. Credit card receivables increased by 5% in the first quarter to $1.6 billion as at January 31, 2004. Business loans and acceptances stood at $17.9 billion as against $18.1 billion at the end of fiscal 2003. The decline was primarily attributable to corporate loans.

Personal deposits increased by approximately $300 million since October 31, 2003 to $23.9 billion. Off-balance sheet savings administered by the Bank and its subsidiaries were up approximately $3.6 billion since the beginning of the new fiscal year to total $55.1 billion as at January 31, 2004. Brokerage activities accounted for more than 70% of the increase.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 10.1% and 13.8%, respectively, as at January 31, 2004, compared to 9.6% and 13.4% as at October 31, 2003. The improvement in the ratios was mainly due to the decline in risk-weighted assets.

Dividends

At its meeting on February 26, 2004, the Board of Directors declared regular dividends on the various classes and series of preferred shares, as well as a dividend of 33 cents per common share, payable on May 1, 2004 to shareholders of record on March 25, 2004.

Caution regarding forward-looking statements

From time to time, National Bank of Canada makes written and oral forward-looking statements, included in this quarterly report, in other filings with Canadian regulators or the U.S. Securities and Exchange Commission, in reports to shareholders, in press releases and in other communications. All such statements are made pursuant to the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among others, statements with respect to the economy, market changes, the achievement of strategic objectives, certain risks as well as statements with respect to our beliefs, plans, expectations, anticipations, estimates and intentions. These forward-looking statements are typically identified by the words "may," "could," "should," "would," "suspect," "outlook," "believe," "anticipate," "estimate," "expect," "intend," "plan," and words and expressions of similar import.

By their very nature, such forward-looking statements require us to make assumptions and involve inherent risks and uncertainties, both general and specific. There is significant risk that express or implied projections contained in such statements will not materialize or will not be accurate. A number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements. Such differences may be caused by factors, many of which are beyond the Bank's control, which include, but are not limited to, changes in Canadian and/or global economic and financial conditions (particularly fluctuations in interest rates, currencies and other financial instruments), liquidity, market trends, regulatory developments and competition in geographic areas where the Bank operates, technological changes, consolidation in the Canadian financial services sector, the possible impact on our businesses of international conflicts and other developments including those relating to the war on terrorism and the Bank's anticipation of and success in managing the risks implied by the foregoing.

The Bank cautions that the foregoing list of important factors is not exhaustive. Investors and others who base themselves on the Bank's forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. The Bank therefore cautions readers not to place undue reliance on these forward-looking statements. The Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time by or on behalf of the Bank.

Disclosure of 1st quarter 2004 results

Conference call

  • A conference call for analysts and institutional investors will be held on February 26, 2004 at 1:00 p.m. ET.
  • Access by telephone: 1-800-387-6216 or (416) 405-9328
  • A recording of the conference call can be heard until March 4, 2004 by calling 1 800 408-3053 or (416) 695-5800. The access code is 1528674.

Webcast

  • The conference call will be webcast live at www.nbc.ca/investorrelations.
  • A recording of the webcast will also be available on the Internet after the call.

Financial documents

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.

Information for shareholders and investors

Investor Relations

Financial analysts and investors who want to obtain financial information on the Bank are asked to contact the Investor Relations Department.

600 de La Gauchetière West, 7th Floor
Montreal, Quebec H3B 4L2
Telephone: (514) 394-0296
Fax: (514) 394-6196
E-mail: investorrelations@nbc.ca
Website: www.nbc.ca/investorrelations

Public Relations

600 de La Gauchetière West, 8th Floor
Montreal, Quebec H3B 4L2
Telephone: (514) 394-8644
Fax: (514) 394-6258
Website: www.nbc.ca
General information: telnat@nbc.ca

Quarterly report publication dates for fiscal 2003-2004

First quarter February 26, 2004
Second quarter May 27, 2004
Third quarter August 26, 2004
Fourth quarter December 2, 2004

Transfer agent and registrar

For information about stock transfers, address changes, dividends, lost stock certificates, tax forms and estate transfers, shareholders are requested to contact the Transfer Agent, National Bank Trust Inc., at the address and telephone numbers below.

National Bank Trust Inc.

Share Ownership Management
1100 University, 9th Floor
Montreal, Quebec H3B 2G7
Telephone: (514) 871-7171
1-800-341-1419
Fax: (514) 871-7442
E-mail: clientele@tbn.bnc.ca

Direct deposit service for dividends

Shareholders may have their dividend payments deposited directly via electronic funds transfer to an account at any financial institution that is a member of the Canadian Payments Association. To do so, simply contact the transfer agent, National Bank Trust Inc., in writing.

Dividend Reinvestment Plan

The National Bank offers holders of its common or preferred shares a Dividend Reinvestment and Share Purchase Plan through which they can invest in shares without paying any commissions or administration fees. Participants may reinvest all cash dividends paid on their shares held or make optional cash payments of at least $500 per payment, to a maximum of $5,000 per quarter to purchase shares. For more information, please contact the Registrar, National Bank Trust Inc., at 1-800-341-1419 or (514) 871-7171.

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 over $82 billion and, together with its subsidiaries, employs close to 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.

For more information:

Michel Labonté
Senior Vice-President
Finance, Technology and Corporate Affairs
(514) 394-8610

Denis Dubé
Director, Public Relations
(514) 394-8644

 First Quarter 2004 

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