Press Releases

National Bank announces net income of $180 million for the second quarter of 2004, an increase of 30%

Montreal, 27 May 2004 -

National Bank announces net income of $180 million for the second quarter of 2004, an increase of 30%

Earnings per share jump 38% to $1.01
Return on common shareholders' equity of 19.0%
15% increase in quarterly dividend

For the quarter
ended April30

Net income

2004

2003

%

Personal and Commercial

92

79

+16

Wealth Management

33

19

+74

Financial Markets

59

37

+59

Other

(4)

3

Total

180

138

+30

Earnings per share

$1.01

$0.73

+38

Return on common shareholders' equity

19.0%

14.8%

For the six months
ended April 30

Net income

2004

2003

%

Personal and Commercial

196

173

+13

Wealth Management

57

38

+50

Financial Markets

131

101

+30

Other

(18)

(8)

Total

366

304

+20

Earnings per share

$2.04

$1.61

+27

Return on common shareholders' equity

19.0%

16.3%

National Bank earned net income of $180 million in the quarter ended April 30, 2004, up 30% compared to $138 million in the corresponding quarter of 2003. Earnings per share amounted to $1.01 in the second quarter versus $0.73 in the same period of 2003, for a 38% increase. Return on common shareholders' equity was 19.0% for the quarter, compared to 14.8% for the quarter ended April 30, 2003.

In addition, at its meeting on May 27, 2004, the Board of Directors of the Bank approved an increase of 15% in the quarterly dividend bringing it to 38 cents per share.

For the second quarter of 2004, every operating segment posted excellent results as evidenced by the growth in net income by segment.

Personal and Commercial Banking declared net income of $92 million for the second quarter of 2004, a $13 million or 16% increase compared to the same period in 2003. In addition to the 8% decrease in the provision for credit losses, the segment's income grew by 7% and operating expenses rose by 5%.

In the Wealth Management segment, net income soared 74% to $33 million from the second quarter 2003 to second quarter 2004. This outstanding performance was due to a 31% rise in income and an improvement in productivity.

Net income for the Financial Markets segment climbed 59% to $59 million, attributable to gains on securities and a higher volume of financial market transactions.

Moreover, as a result of the improved quality of the loan portfolio, the Bank reduced its general allowance for credit risk by $20 million ($13 million net of income taxes or 7 cents per share). This reduction was charged to the “Other” heading in segment results.

For the first six months of 2004, the Bank recorded net income of $366 million as against $304 million for the same period last year, for growth of 20%. At $2.04, earnings per share were up 27% from $1.61 for the year earlier period. Return on common shareholders' equity was 19.0% compared to 16.3% for the first six months of fiscal 2003.

As at April 30, 2004, the specific and general allowances for credit risk exceeded gross impaired loans by $165 million versus $171 million as at January 31, 2004 and $154 million as at October 31, 2003. The $6 million increase over the previous quarter was attributable to the $20 million reduction in the general allowance for credit risk, which now stands at $385 million. Excluding this item, net impaired loans were down $14 million from January 31, 2004.

Tier 1 and total capital ratios were 9.6% and 13.2%, respectively, as at April 30, 2004 in comparison to 10.1% and 13.8% as at January 31, 2004 and 9.6% and 13.4% as at October 31, 2003.

The Bank repurchased 5.9 million common shares for cancellation as at April 30, 2004 under the normal course issuer bid for the repurchase of up to 8.7 million common shares.

“Our excellent second-quarter results demonstrate the ability of our business model to tap into the strength of the Canadian economy. With our three segments each posting earnings growth of more than 10%, we are satisfied that we are on course to meet our annual targets,” said Réal Raymond, President and Chief Executive Officer. “These results reflect our ongoing efforts to grow our business volume while keeping a tight rein on expenses and maintaining the quality of our loan portfolio.”

Objectives

Results Q2 2004

Results First 6 months of 2004

Growth in earnings per share

5% - 10%

38%

27%

Return on common shareholders' equity (ROE)

15% - 17%

19.00%

19.00%

Tier 1 capital ratio

8.75% - 9.50%

9.60%

9.60%

Dividend payout ratio

35% - 45%

32%

32%

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 second quarter and first half of 2004.

Analysis of Results

Operating Results

For the second quarter ended April 30, 2004, National Bank earned net income of $180 million, compared to $138 million for the same period one year earlier. Earnings per share reached $1.01 compared to $0.73 for the second quarter of 2003, up 38%. Return on common shareholders' equity was 19.0%, as against 14.8% for the quarter ended April 30, 2003.

For the six-month period ended April 30, 2004, net income totalled $366 million, compared to $304 million for the first half of 2003, an increase of 20%. At $2.04, earnings per share for the first half of 2004 were up 27% from $1.61 per share for the corresponding period of 2003. Finally, return on common shareholders' equity, at 19.0%, was substantially ahead of the 16.3% result recorded for the first six months of 2003.

Results by Segment

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

Personal and Commercial

Quarterly net income for the Personal and Commercial segment amounted to $92 million, up 16% from the $79 million for the same period of 2003. This improvement over the corresponding period of 2003 owes to the combined effect of higher revenues, the lower provision for credit losses and enhanced productivity.

At $316 million, net interest income rose $16 million, or 5%, compared to the second quarter of 2003. This growth was due to the volume of loans and acceptances, specifically consumer loans, which rose 21%, and the spread, which inched up two basis points to 3.21% for the second quarter of 2004. Other income increased by $14 million to $160 million owing to transaction account revenues, lending fees and foreign exchange revenue.

Operating expenses for the quarter were $297 million, as against $283 million for the same period of 2003. The increase was divided mainly between compensation and the cost of technological investments. The efficiency ratio was 62.4% in the second quarter of 2004, down from 63.5% for the second quarter of 2003.

For the first six months of fiscal 2004, net income for the Personal and Commercial segment amounted to $196 million, up 13% over the same period of 2003. This improvement is explained by the approximate 4% increase in the volume of loans and acceptances, the wider spread, growth in other income, and lower credit losses, which fell from $80 million in the first half of 2003 to $65 million for the same period of 2004.

Wealth Management

The Wealth Management segment continued to experience a high level of activity in the second quarter of 2004, which drove net income up an impressive 74% to $33 million dollars, compared to $19 million for the same period one year earlier.

Total revenues grew to $205 million in the second quarter of 2004 from $156 million in the same period of 2003, an increase of 31%. Close to 70% of the increase derived from brokerage activities, with the remainder coming from investment management and mutual fund revenues.

Operating expenses totalled $154 million for the second quarter of 2004, as against $125 million for the same period of 2003. Variable compensation accounted for approximately 80% of the increase. However, the efficiency ratio improved substantially, from 80.1% in the second quarter of 2003 to 75.1% this quarter, it reflects a significant growth in revenues while a portion of the operating expenses remain fixed.

For the first half of fiscal 2004, net income for the Wealth Management segment reached $57 million, compared to $38 million for the first half of 2003, with revenues growing 23% and operating expenses increasing 18%.

Financial Markets

Net income for the Financial Markets segment amounted to $59 million for the second quarter of 2004, up 59% from the $37 million recorded for the same period of 2003.

Revenues for the quarter climbed $60 million, or 32%, to $248 million. Approximately 40% of the increase was attributable to financial market fees. Gains on investment account securities, which grew by $38 million, due, in particular, to losses on credit derivatives recorded in the second quarter of 2003, accounted for the remainder of the increase. In addition, trading revenues held steady over the corresponding quarter of 2003.

Q2
2004

Q2
2003

First six months
2004

First six months 2003

Trading revenues

(millions of dollars)

Financial Markets

Interest rate

10

22

34

53

Equity

53

29

100

51

Commodities and foreign exchange

-

12

13

22

63

63

147

126

Other segments

2

3

4

6

Total

65

66

151

132

Net interest income

7

11

(63)

27

Other income

49

43

209

82

Taxable equivalent

9

12

5

23

Total

65

66

151

132

Operating expenses were $136 million for the quarter, compared to $117 million for the second quarter of 2003. The increase was primarily due to variable compensation.

The provision for credit losses amounted to $17 million for the quarter, compared to $13 million for the same period last year.

For the first half of fiscal 2004, the Financial Markets segment generated net income of $131 million, a 30% increase over the same period last year. The reason for the increase is twofold: first, revenues, fuelled by a resurgence in financial market activity and the solid performance of Treasury, rose by 21% to $516 million. Second, the efficiency ratio improved, going from 57.6% for the first six months of 2003 to 51.9% for the first half of 2004.

Other

The net loss for the “Other” heading of results by segment totalled $4 million for the second quarter of 2004, compared to net income of $3 million for the same period of 2003.

The credit amount of the provision for credit losses comprises the reversal of $20 million from the general allowance for credit risk.

For the six-month period ended April 30, 2004, the “Other” heading posted a net loss of $18 million, compared to a net loss of $8 million for the corresponding period of 2003.

Consolidated Results

Revenues

Total revenues for the second quarter of 2004 amounted to $884 million, compared to $773 million for the same period of 2003, an increase of $111 million, or 14%.

Net interest income totalled $328 million for the quarter, compared to $343 million for the second quarter of 2003. The decrease was due to the reduction in capital resulting from share purchase programs, to the lower volume of corporate loans and to the decline in asset and liability matching income from the same period of 2003. However, net interest income in the Personal and Commercial segment grew $16 million, or 5%, to reach $316 million for the second quarter of 2004. Financial market fees, totalling $178 million for the quarter, were up $58 million, or 48%, and accounted for over half of the increase in total revenues. This growth reflects the high volume of individual and institutional trading on financial markets. Gains on investment account securities were up $26 million to $16 million in the second quarter of 2004, primarily owing to losses recorded on credit derivatives in the second quarter of 2003. Finally, revenues from trust services and mutual funds, amounting to $62 million for the quarter, were up $11 million, or 22%. This growth was attributable to the correspondent network, investment management and the increase in assets under management in mutual funds.

For the first six months of fiscal 2004, total revenues were $1,797 million, compared to $1,608 million for the corresponding half of 2003, an increase of 12%. Excluding the “Other” heading, a fifth of the increase was derived from Personal and Commercial banking activities, around 35% from Wealth Management revenues and the remainder from revenues at Financial Markets.

Operating Expenses

Operating expenses for the quarter totalled $602 million, an increase of $73 million, compared to $529 million for the same quarter of 2003. Salaries and staff benefits, which amounted to $347 million for the quarter and accounted for close to 60% of expenses, were up $55 million from the corresponding quarter of 2003. Approximately 80% of the increase was due to variable compensation related to growth in financial market revenues.

For the first six months of fiscal 2004, operating expenses were $1,181 million, compared to $1,077 million for the same period of 2003. Nearly 60% of the $104 million increase was attributable to variable remuneration. The efficiency ratio went from 67.0% for the first half of 2003 to 65.7% for the first half of 2004.

Risk Management

Credit Risk

The provision for credit losses for the quarter was $19 million, compared to $41 million for the corresponding quarter of 2003. The decline in the provision stemmed primarily from the $20 million reduction in the general allowance for credit risk. Moreover, credit losses in the Personal and Commercial segment were down 8% or $3 million to $36 million. In the Financial Markets segment, the provision for credit losses rose $4 million to $17 million for the second quarter of 2004.

As at April 30, 2004, allowances for credit losses exceeded impaired loans by $165 million, compared to $154 million as at October 31, 2003 and $179 million at the end of the corresponding quarter of 2003. Corporate Banking and Real Estate were chiefly responsible for the decline 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 12.6% as at April 30, 2004 versus 13.0% as at October 31, 2003 and 13.3% as at April 30, 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 following table entitled “Trading Activities” illustrates the allocation of market risk by type of risk: interest rate, foreign exchange, commodities and equity price.

Trading Activities (1)
(millions of dollars)

Global VaR by risk category

For the quarter ended April 30, 2004

For the quarter ended January 31, 2004

Period end

High

Average

Low

Period end

High

Average

Low

Interest rate

(6)

(7)

(4)

(3)

(4)

(7)

(5)

(3)

Foreign exchange

(1)

(2)

(1)

-

(1)

(2)

(1)

-

Equity

(2)

(3)

(2)

(2)

(2)

(4)

(2)

(1)

Commodities

-

(1)

-

-

-

-

-

-

Correlation effect(2)

3

7

3

2

3

7

3

-

Global VaR

(6)

(6)

(4)

(3)

(4)

(6)

(5)

(4)

(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

As at April 30, 2004, the Bank's total assets stood at $83.7 billion, compared to $82.4 billion as at October 31, 2003. Loans were the principal drivers of the increase. The table below presents the main loan and deposit items.

Average monthly volumes

April

October

(millions of dollars)

2004

2003

Loans and acceptances*

Residential mortgages

18,544

18,105

Consumer loans

5,842

5,193

Credit card receivables

1,576

1,525

Business loans

18,210

18,143

44 172

42 966

Deposits

Personal (balance)

24,048

23,512

Off-balance sheet personal savings (balance)

55,752

51,525

Business

10,554

10,533

*including securitized assets

As at April 30, 2004, residential mortgages totalled $18.5 billion, up approximately $400 million or 2.4% from October 31, 2003. Consumer loans, which stood at $5.8 billion, have risen 12.5% since the beginning of fiscal 2004. Excluding indirect loans, this growth, which was mainly due to partnership volumes, would have been 15%. Credit card receivables have increased 3.3% since the beginning of fiscal 2004 to $1.6 billion as at April 30, 2004. Business loans and acceptances stood at $18.2 billion versus $18.1 billion as at October 31, 2003. Lower corporate loan volumes offset the growth of nearly 2.3% in small and medium-sized business loans.

Personal deposits have grown by approximately $500 million or 2.3% since October 31, 2003 to $24.0 billion. As at April 30, 2004, off-balance sheet savings administered by the Bank and its subsidiaries stood at $55.8 billion, an increase of $4.2 billion or 8.2%. The savings products administered by the brokerage subsidiaries accounted for more than 60% of this growth, mutual funds for $900 million and the products administered by National Bank Trust for the balance.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 9.6% and 13.2%, respectively, as at April 30, 2004, compared to 9.6% and 13.4% as at October 31, 2003.

Dividends

At its meeting on May 27, 2004, the Board of Directors declared regular dividends on the various classes and series of preferred shares, as well as a dividend of 38 cents per common share, payable on August 1, 2004 to shareholders of record on June 28, 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.

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

Disclosure of Second Quarter 2004 Results

Conference Call

A conference call for analysts and institutional investors will be held on May 27, 2004 at 1:00 p.m. ET
Access by telephone is 1-877-211-7911 or (416) 405-9310
A recording of the conference call can be heard until June 2, 2004, by calling 1-800-408-3053 or (416) 695-5800. The access code is 3049614.

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 quarterly financial statements are available at all times on the National Bank's Web site 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 Web site shortly before the start of the conference call.

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

National Bank offers holders of its common and 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 the 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 close to $81 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

Second Quarter 2004

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