Press Releases

National Bank announces record net income of $239 million for the first quarter of 2005, up 28% from $186 million for the same period of 2004

Montreal, 24 February 2005 -

·  Quarterly earnings per share of $1.39, an increase of 35%
·  Return on common shareholders’ equity of 23.6%

 

For the quarter
ended January 31

 

Net income

2005

2004

%

Personal and Commercial

              114

             105

+ 9

Wealth Management

              27

              23

 + 17

Financial Markets

               78

              73

+ 7

Other

             20

 (15)

 

Total

            239

 186

+  28

Earnings per share

$1.39

$1.03

+  35

Return on common shareholders’ equity

23.6%

19.0%

 

For the first quarter ended January 31, 2005, National Bank reported record net income of $239 million, compared to $186 million for the corresponding quarter one year earlier. Earnings per share for the quarter stood at $1.39, up 35% from $1.03 per share in the first quarter of 2004.

Return on common shareholders’ equity reached a new high of 23.6% for the quarter, compared to 19.0% for the same period one year earlier.

This sterling performance was attributable to the contribution of the Personal and Commercial and Wealth Management segments and the high quality of the loan portfolio, which was reflected in a major reduction in the allowance for credit losses, particularly in the Financial Markets segment. The Bank also realized a pre-tax gain of about $37 million when it disposed of investments in financial institutions in South America, which added 15 cents to earnings per share for the quarter.

Total revenues stood at $983 million for the quarter, as against $911 million for the first quarter of 2004, for an increase of nearly 8%. Excluding the gain realized on the disposal of investments, more than 50% of this increase was attributable to the Personal and Commercial segment.

Operating expenses were $613 million for the quarter versus $577 million for the corresponding quarter one year earlier. Two-thirds of the increase derived from the Financial Markets segment, primarily due to variable compensation. The efficiency ratio improved from 62.7% for the first quarter of 2004 to 61.4% this quarter.

The provision for credit losses amounted to $17 million for the first quarter of 2005, down more than 60% compared to the corresponding period of 2004.

The Personal and Commercial segment generated net income of $114 million for the quarter, up 9% from $105 million for the same period one year earlier. This growth resulted from an increase in the volume of consumer loans and in credit card and insurance revenues, and from the decrease in credit losses for Commercial Banking.

In the first quarter of 2005, retail brokerage activities, mutual funds distribution and private investment management products continued to make gains, helping to push up net income in the Wealth Management segment by 17% to $27 million from the $23 million reported for the corresponding quarter of 2004.

The Financial Markets segment earned net income of $78 million for the quarter, as against $73 million for the first quarter of 2004. This 7% increase was mainly due to the decrease in credit losses.

Net income for the “Other” heading of segment results progressed from a $15 million net loss in the first quarter of 2004 to net income of $20 million for the first quarter of 2005, primarily on the strength of the gain on the disposal of investments in South America.

“The Bank’s performance underscores its ability to achieve high growth through a balanced portfolio of activities and the positive contribution of its activities under development, which are suited to our competencies and competitive strengths,” commented Réal Raymond, President and Chief Executive Officer.

As at January 31, 2005, gross impaired loans amounted to $304 million, down $84 million from October 31, 2004. This decrease was mirrored across all business loan categories. The ratio of gross impaired loans to total risk-adjusted capital and allowances stood at only 8.2%. Specific allowances and the general allowance for credit risk exceeded gross impaired loans by $216 million as at January 31, 2005, compared to $190 million as at October 31, 2004. At $350 million, the general allowance for credit risk remained unchanged at the end of the first quarter.

Tier 1 and total capital ratios were 9.6% and 13.5%, respectively, as at January 31, 2005 versus 9.6% and 13.0% as at October 31, 2004. During the quarter, the Bank issued $350 million of subordinated debentures, which added 0.8% to the total capital ratio. As at the end of quarter, the Bank had not made any purchases under its normal course issuer bid commenced on January 13, 2005 to repurchase up to 8.4 million common shares.

“These strong results were supported by active risk and capital management. National Bank’s excellent performance is a tribute to the quality of our strategies and teams,” Mr. Raymond added. 

 

 Objectives

1st quarter 2005 

Growth in earnings per share

 5% - 10%

35% 

Return on common
shareholders' equity

 16% - 18%

23.6% 

Tier 1 capital ratio

 More than 8.5%

9.6% 

Dividend payout ratio

 35% - 45%

34% 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND OPERATING RESULTS

The following text presents Management’s discussion and analysis of the Bank’s financial condition and operating results.  This analysis was prepared in accordance with the requirements set out in Regulation 51-102 respecting Continuous Disclosure Obligations of the Canadian Securities Administrators and is based on the unaudited interim consolidated financial statements for the first quarter of 2005.

Critical Accounting Estimates

A summary of the significant accounting policies used by the Bank is presented in Note 1 and Note 2 to the audited consolidated financial statements as at October 31, 2004 on pages 90 to 97 of the 2004 Annual Report. 

Page 56 of the 2004 Annual Report presents explanations of certain accounting policies that are considered critical because they are important to the presentation of the Bank’s financial condition and operating results, and require difficult, subjective and complex judgements and estimates because they relate to matters that are inherently uncertain. We invite the reader to refer to the Annual Report for these explanations. 

Changes in Accounting Policies

On November 1, 2004, the Bank adopted the following accounting standards:

Variable interest entities
On November 1, 2004, the Bank adopted CICA Accounting Guideline No.15 “Consolidation of Variable Interest Entities” (AcG-15). This Guideline is harmonized with new FASB Interpretation No. 46 (FIN 46R) of the same name and provides guidance on the application of the standards set out in CICA Handbook Section 1590 “Subsidiaries” for certain entities defined as variable interest entities (“VIEs”). VIEs are entities in which equity investors do not have controlling financial interest or the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by other parties. AcG-15 requires the consolidation of a VIE by its primary beneficiary, i.e., the party that receives the majority of the expected residual returns and/or absorbs the majority of the entity’s expected losses. The application of the provisions of AcG-15 on November 1, 2004 results in the consolidation of certain mutual funds in which the Bank had a significant investment and the consolidation of the VIE that leases the Bank’s head office building. The impact of this standard as at November 1, 2004 was an increase in “Premises and equipment” of $84 million, “Securities” of $54 million, “Other assets” of $3million, “Other liabilities” of $93 million, “Non-controlling interest” of $45 million and “Retained earnings” of $3 million. Prior period consolidated financial statements have not been restated for this change.

Investment companies
On November 1, 2004, the Bank adopted Accounting Guideline No. 18 “Investment Companies” published in January 2004 by the Canadian Institute of Chartered Accountants. Under this Guideline, investment companies are required to account for all investments at  fair value, including investments that would otherwise be consolidated or accounted for using the equity method. The Guideline sets out the criteria for determining whether a company is an investment company and also provides guidance on the circumstances in which the parent company of, or equity method investor in, an investment company should account for the investment company’s investments at fair value. The impact of this new Guideline on the consolidated financial statements for the first quarter of 2005 is negligible.

Analysis of Results

Operating Results
National Bank reported net income of $239 million for the first quarter ended January 31, 2005, compared to $186 million for the corresponding quarter one year earlier.  Earnings per share for the quarter amounted to $1.39, as against $1.03 for the same period of 2004, for an increase of 35%. Return on common shareholders’ equity stood at 23.6% for the quarter, up from 19% for the quarter ended January 31, 2004.

Results by Segment

Personal and Commercial
Net income for the Personal and Commercial segment totalled $114 million for the first quarter of 2005, up 9% from $105 million in the corresponding quarter of 2004. Growth in the volume of consumer loans and in credit card and insurance revenues, combined with lower credit losses at Commercial Banking were the main reason for the improvement in this segment’s results.

At $324 million, net interest income for the quarter was $10 million or 3% higher than for the same period of 2004. The increase in net interest income was due to $2.9 billion or 7% growth in average assets, especially consumer loans, while the spread was 14 basis points narrower than in the corresponding quarter of 2004. Other income for the quarter totalled $179 million, up $8 million or 5% from the first quarter of 2004.  The main sources of growth were credit card and insurance revenues. Operating expenses for the first quarter of 2005 stood at $304 million, compared to $292 million for the same period of 2004, an increase of 4%. The efficiency ratio remained relatively stable at about 60%.   The provision for credit losses was $27 million, down $2 million or 7%, owing to Commercial Banking.

Wealth Management
Net income for Wealth Management in the first quarter of 2005 was $27 million compared to $23 million for the same period in 2004, representing an increase of $4 million or 17%. Total revenues amounted to $195 million for the quarter, up 5% from the $186 million recorded in the corresponding quarter of 2004. Most of the increase was derived from retail brokerage activities, the distribution of mutual funds and private investment management products. Operating expenses were $153 million for the first quarter of 2005, up 3% from $149 million for the year-earlier period.  The efficiency ratio improved from 80.1% in the first quarter of 2004 to 78.5% this quarter.

Financial Markets
Net income for the Financial Markets segment stood at $78 million as against $73 million for the same period in 2004, an increase of 7%. At $2 million, the provision for credit losses for the quarter was down significantly from the $24 million that the Bank had recorded for this segment in the first quarter of 2004, due to specific allowances for the steel industry.

Total revenues for the segment amounted to $275 million for the quarter ended January 31, 2005 compared to $269 for the year-earlier period. Gains on investment account securities were up approximately $10 million, while trading revenues declined by $6 million.

Trading Revenues
(millions of dollars)

Q1
2005

Q1
2004

Financial Markets

 

 

Interest rate

17

25

Equities

58

46

Commodities and foreign exchange

3

13

 

78

84

Other segments

4

2

Total

82

86

Breakdown by Income Statement line item

 

 

Net interest income

(2)

(70)

Other income

84

160

Taxable equivalent

-

(4)

 

82

86

Operating expenses were $155 million for the quarter compared to $132 million for the first quarter of 2004. The increase was essentially attributable to variable compensation.

Other
Net income for the "Other" heading of segment results totalled $20 million in the first quarter of 2005 compared to a loss of $15 million for the same period last year. Total revenues were $10 million for the quarter as against a loss of $29 million for the year-earlier period.  The variance was chiefly attributable to the gain on the disposal of investments in financial institutions in South America. 

Consolidated Results

Total Revenues
Total revenues for the first quarter of 2005 amounted to $983 million, for an increase of 8% compared to the $911 million recorded in the corresponding quarter of 2004.

Net interest income totalled $349 million for the quarter, up $75 million from the $274 million posted in the first quarter of 2004.  Net interest income for the Financial Markets segment was up $68 million, which must be analyzed in conjunction with the trading revenues recorded in other income.  Net interest income for Personal and Commercial rose $10 million or 3% to $324 million for the first quarter of 2005, primarily because of higher volumes of consumer loans, which were partially offset by a narrowing of the spread.

Other income for the first quarter of 2005 was $634 million as against $637 million for the corresponding period of fiscal 2004.

The portion of trading revenues recorded as other income fell $76 million from the corresponding quarter of 2004.  However, if net interest income related to trading activities is included, total trading revenues for the quarter were down only $4 million. Gains on investment account securities advanced $84 million to $77 million in the first quarter of 2005 owing to gains from merchant banking, a gain on the disposal of investments in South America and the $31 million impairment charge recorded on corporate investments in the first quarter of 2004.

Financial market fees, for their part, were $169 million for the quarter, up $5 million over the corresponding period of 2004, card service revenues rose $3 million to total $15 million, and trust service and mutual fund fees rose $8 million to $65 million.

Lastly, at $58 million for the first quarter of 2005, lending fees were down $22 million due to the $25 million that had been recorded as income last year for the unamortized balance of certain mortgage prepayment fees further to the application of a new accounting standard that came into effect in the first quarter of 2004. 

Operating Expenses
Operating expenses for the quarter were $613 million compared to $577 million for the corresponding period of 2004.  Salaries and staff benefits, at $367 million for the quarter, were $22 million higher than the year-earlier period, mainly as a result of variable compensation.  The increase in salaries and staff benefits accounted for close to two-thirds of the total increase in operating expenses.  The computers and equipment heading, which was $84 million for the first quarter of 2005, increased by $11 million because of investments in technology.

Cash Flows

Due to the nature of the Bank’s business, most of its revenues and expenses are cash items. Moreover, significant cash flow movement can be observed, especially in trading activities, which impacts several assets and liabilities such as trading account securities, securities sold short or securities sold under repurchase agreements.

For the first quarter of 2005, cash and cash equivalents rose $1.3 billion compared to an increase of $1.2 billion for the first quarter of 2004.  As at January 31, 2005, cash and cash equivalents totalled $7.0 billion versus $8.3 billion one year earlier.

Operating activities required cash of $0.9 billion chiefly because of trades in settlement.  For the corresponding quarter of 2004, the reduction in trading account securities represented $1.5 billion of the $1.9 billion in cash flows from operating activities.

Financing activities generated cash of $4.1 billion, of which $3.2 billion was attributable to higher deposits, particularly purchased funds, whereas in the first quarter of 2004, the $2 billion variation in securities sold under repurchase agreements accounted for the cash outflows from financing activities.

Lastly, investing activities in the first quarter of 2005 required $1.9 billion in cash owing to the $1.3 billion increase in loans and a higher volume of securities purchased under reverse repurchase agreements.  For the corresponding period of 2004, investing activities generated $1.3 billion primarily because of purchases and sales of investment account securities.

Risk Management

Credit Risk
The Bank recorded a provision for credit losses of $17 million for the quarter compared to $44 million for the corresponding quarter of 2004.  Of the $27 million decline, $22 million can be attributed to the reduction in the provision at Corporate Banking.

As at January 31, 2005, the allowance for credit losses exceeded impaired loans by $216 million compared to $190 million as at October 31, 2004.  The $26 million improvement is attributable to all segments offering business loans.

The ratio of gross private impaired loans to total risk-weighted assets and allowances was excellent at 8.2% as at January 31, 2005 versus 10.9% as at October 31, 2004.

Market Risk – Trading Activities

The Value-at-Risk (VaR) simulation model is one of the main tools used to manage market risk in trading activities.  The VaR measure is based on a 99% confidence level, which is an estimate of the maximum potential trading loss in 99 out of 100 days, which means that actual losses will probably exceed VaR on only one day out of 100.  The computerized VaR calculation model is based on two years of historical data.  Market risk management is discussed in more detail on page 63 of the 2004 Annual Report.

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

Trading Activities (1)
(millions of dollars)

Global VaR by risk category

For the quarter ended
January 31, 2005

For the quarter ended
October 31, 2004

 

Period end

High

Average

Low

Period end

High

Average

Low

Interest rate

(3.6)

(6.5)

(4.0)

(2.0)

(3.7)

(4.9)

(3.7)

(2.7)

Foreign exchange

(0.9)

(3.3)

(1.3)

(0.5)

(0.9)

(2.9)

(1.7)

(0.7)

Equity

(4.7)

(6.2)

(4.4)

(2.7)

(3.6)

(5.4)

(3.8)

(3.0)

Commodity

(0.7)

(1.0)

(0.7)

(0.5)

(1.0)

(1.0)

(0.8)

(0.6)

Correlation effect(2)

4.2

  9.9

  4.7

1.3

3.6

6.6

4.2

2.4

Global VaR

(5.7)

(7.1)

(5.7)

(4.4)

(5.6)

(7.6)

(5.8)

(4.6)

(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 January 31, 2005, the Bank’s assets stood at $91.7 billion compared to $88.7 billion at the end of fiscal 2004. Loans and acceptances were up $0.8 billion, while cash resources, securities and securities purchased under reverse repurchase agreements rose $2 billion.  The following table presents the main portfolios.

Average monthly volumes
(millions of dollars)

January
2005

October
2004

January
2004

Loans and acceptances*

 

 

 

Residential mortgages

19,846

19,554

18,308

Consumer loans

6,629

6,491

5,357

Credit card receivables

1,652

1,589

1,539

Business loans

17,062

17,276

17,901

 

45,189

44,910

43,105

Deposits

 

 

 

Personal (balance)

24,089

23,675

23,853

Off-balance sheet savings (balance)

59,526

57,207

49,383

Business

10,485

10,668

10,359

*including securitized assets

Residential mortgages as at January 31, 2005 were up $300 million from October 31, 2004 to $19.8 billion.  Residential mortgages rose $1.5 billion or 8% versus January 31, 2004.  At $6.6 billion, the volume of consumer loans has increased nearly 2% since the beginning of the fiscal year.  Consumer loans were up $1.3 billion or 24% from January 31, 2004, with close to half of this strong growth attributable to volumes from partnerships.  Credit card receivables have increased 4% since November 1, 2004 to $1.7 billion as at January 31, 2005. 

Business loans and acceptances were $17.1 billion at the end of the first quarter as compared to $17.3 billion at the end of fiscal 2004.  Corporate loans accounted for the slight decline.

Personal deposits stood at $24.1 billion as at January 31, 2005 compared to $23.7 billion as at October 31, 2004.  Off-balance sheet personal savings administered by the Bank as at January 31, 2005 totalled $59.5 billion, up $2.3 billion or 4% since the end of the previous fiscal year.  The increase was attributable to savings administered by the brokerage subsidiaries. 

Capital
Tier 1 and total capital ratios, according to the rules of the Bank for International Settlements, were 9.6% and 13.5%, respectively, as at January 31, 2005, compared to 9.6% and 13.0% as at October 31, 2004.  During the quarter, the Bank issued $350 million of subordinated debentures, which added 0.8% to the total capital ratio.  At the end of the quarter, the Bank had not made any purchases of common shares under its normal course issuer bid commenced on January 13, 2005 to repurchase up to 8.4 million common shares.

Dividends
At its meeting on February 24, 2005, the Board of Directors declared regular dividends on the various classes and series of preferred shares as well as a dividend of 42 cents per common share payable on May 1, 2005 to shareholders of record on March 24, 2005.

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, 10th 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 2004-2005
Second quarter: May 26, 2005
Third quarter: August 25, 2005
Fourth quarter: December 8, 2005

DISCLOSURE OF 1st QUARTER 2005 RESULTS

Conference Call:
·  A conference call for analysts and institutional investors will be held onFebruary 24, 2005 at1:00 p.m. ET.
·  Access by telephone is1-877-211-7911or (416) 405-9310
·  A recording of the conference call can be heard until March 3, 2005 by calling
1-800-408-3053 or (416) 695-5800.  The access code is 3139876.

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 National Bank’s website 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 National Bank’s website 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 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.

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 2005

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