Press Releases

National Bank announces record net income of $855 million for 2005

Montreal, 8 December 2005 -

·  All financial objectives achieved or surpassed
· 
Earnings per share up 21% to $4.98
· 
Return on common shareholders’ equity of 20.7%
·  Quarterly dividend up 9% at 48 cents per share

(millions of dollars)

For the quarter
ended October 31

 

Net income

2005

2004

%

Personal and Commercial

              112

               98

+ 14

Wealth Management

               27

                 23

+ 17

Financial Markets

               50  

                 63

- 21

Other

               18

                8

     

Total

             207

               192

+ 8

Earnings per share

$1.22

$1.11

+ 10

Return on common shareholders’ equity

19.4%

19.7%

 

         

(millions of dollars)

For the fiscal year
   ended October 31

 

Net income

2005

2004

%

Personal and Commercial

              453

             392

+ 16

Wealth Management

             115

            100

+ 15    

Financial Markets

              250

                245

+ 2

Other

              37

              (12)

 

Total

             855

            725

+ 18

Earnings per share

$4.98

$4.10

+ 21

Return on common shareholders’ equity

20.7%

18.8%

 

MONTREAL, December 8, 2005 For the fourth quarter ended October 31, 2005, National Bank reported net income of $207 million, compared to $192 million for the corresponding quarter one year earlier, an increase of 8%. Earnings per share stood at $1.22, up 10% from $1.11 per share for the fourth quarter of 2004. Return on common shareholders’ equity was 19.4% for the quarter as against 19.7% for the year-earlier period.

Net income for fiscal 2005 reached a new high of $855 million, up 18% from last year’s record of $725 million. Earnings per share were $4.98 as against $4.10 the year earlier, an increase of 21%. Return on common shareholders’ equity rose from 18.8% in 2004 to 20.7% in fiscal 2005. The Bank declared dividends on common shares of $1.72 in 2005 versus $1.42 in 2004, an increase of 21%.

The Bank recorded a $25 million reversal of the general allowance for credit risk in the fourth quarter of 2005, compared to a $35 million reversal in the year-earlier period. Excluding these reversals, net income for the quarter would have been $190 million, up 12% from $169 million in the fourth quarter of 2004. Earnings per share would have been $1.12 for the fourth quarter of 2005, 14% higher than in the year-earlier period,

when earnings per share stood at $0.98. For fiscal 2005, the general allowance was reduced by $42 million as against $55 million for the previous year. If these items were excluded, net income for fiscal 2005 would have been $827 million, up $138 million or 20%, while earnings per share would have been $4.81, up 23% from $3.90 in 2004.

The Bank’s results reflected the excellent growth at the Personal and Commercial and Wealth Management segments stemming from higher volumes with individuals and businesses in an environment where credit quality remained favourable throughout the fiscal year.

“The performance of National Bank demonstrates that it continues to grow at a solid pace on the strength of the contribution of all its segments,” declared Réal Raymond, President and Chief Executive Officer. “The fourth quarter was marked by contrasts

in the economic and financial environment: volumes for the Personal and Commercial and Wealth Management segments increased, while volume growth at Financial Markets was more limited. The Bank nevertheless performed remarkably well.”

Results by Segment
The Personal and Commercial segment generated net income of $112 million for the fourth quarter of 2005, up 14% from $98 million for the year-earlier period due to the 4% growth in revenues, which was driven by the 9.6% increase in the volume of loans and acceptances. For fiscal 2005, net income for the Personal and Commercial segment reached $453 million, up 16% from $392 million in 2004. The advance in the segment’s net income stemmed from higher business volumes, an improved efficiency ratio and a lower credit loss provision for businesses.

Net income for the Wealth Management segment totalled $27 million for the quarter, for an increase of 17% compared to $23 million for the corresponding quarter of 2004.

Revenues rose by 14%, fuelled in particular by retail brokerage activities and mutual funds. For fiscal 2005, the Wealth Management segment’s net income was up 15% to $115 million from $100 million a year earlier primarily owing to private investment management and retail brokerage activities.

At Financial Markets, net income slipped 21% to $50 million for the fourth quarter of 2005 from $63 million for the same period of 2004, mainly due to lower gains on investment account securities. For fiscal 2005, net income for Financial Markets amounted to $250 million compared to $245 million in 2004. The significant decrease in the provision for credit losses was partially offset by an increase in operating expenses, chiefly attributable to variable compensation linked to the revenue mix.

Credit Risk
For the fourth quarter of 2005, the Bank recorded specific provisions for credit losses of $25 million, compared to $27 million for the corresponding quarter in 2004.  Consequently, the specific provisions for credit losses for fiscal 2005 were $75 million, compared to $141 million for the preceding fiscal year. The decrease of almost 50% in the specific provisions in 2005 was attributable to both commercial loans and corporate lending.

As at October 31, 2005, gross impaired loans amounted to $260 million, down $128 million or 33% from the beginning of the fiscal year. All business loan portfolios contributed to the decrease. The ratio of gross impaired loans to total adjusted capital and allowances was a mere 6.8%. Taking into account the general allowance for credit risk, allowances exceeded gross impaired loans by $191 million as at October 31, 2005, compared to $190 million as at October 31, 2004, despite a decrease in the general allowance for credit risk from $350 million as at October 31, 2004 to $308 million as at the end of fiscal 2005.

Regulatory Capital
Tier 1 and total capital ratios went from 9.6% and 13.0%, respectively, as at October 31, 2004 to 9.6% and 12.8% as at the end of fiscal 2005, taking into account the $500 million debenture issued on November 2, 2005. On August 15, 2005, the Bank redeemed 7 million preferred shares, Series 13, totalling $175 million, which had already been excluded from regulatory capital in the previous quarter. In October 2005, the Bank converted a US $250 million debenture into deposit notes.

Réal Raymond noted that ”these record results confirm National Bank’s potential for growth. All our financial objectives were achieved or surpassed and we will continue to deliver on our commitment to balance the interests of all stakeholders – our shareholders, our clients and our employees.”

In closing, Mr. Raymond took the opportunity to underscore the contribution of all employees to the Bank’s excellent performance. “Our success is a testament to what team work can do!”

Financial Objectives





 

Objectives

Results
4th quarter
2005

Results
fiscal
2005

Growth in earnings per share

       5% - 10%

10%

21%

Return on common shareholders’ equity  

     16% - 18%

19.4%

20.7%

Tier 1 capital ratio

More than 8.5%

9.6%

9.6%

Dividend payout ratio

35% - 45%

35%

35%

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

December 8, 2005 – 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 fourth quarter and the consolidated financial statements for fiscal 2005. Additional information about National Bank of Canada, including the Annual Information Form, can be obtained from the SEDAR website at www.sedar.comand the Bank’s website at www.nbc.ca

Analysis of Results

Consolidated Results
National Bank reported net income of $207 million for the fourth quarter ended October 31, 2005, compared to $192 million for the corresponding quarter of 2004, for an increase of 8%. Earnings per share stood at $1.22, up 10% from $1.11 per share for the fourth quarter of 2004.

Net income for fiscal 2005 reached a new high of $855 million, up 18% from last year’s record of $725 million. Earnings per share were $4.98 as against $4.10 the year earlier, an increase of 21%.

Total Revenues
Total revenues for the fourth quarter of 2005 amounted to $931 million, up 4.4% compared to the $892 million recorded in the corresponding quarter of 2004.

Net interest income was $402 million for the quarter versus $380 million posted in the corresponding quarter of 2004. Net interest income for the Personal and Commercial segment advanced $18 million or 5.7% to $334 million for the quarter, because of higher volumes of personal and business loans, which were partially offset by a narrowing of the spread. The Financial Markets segment generated net interest income of $129 million, an increase of $19 million. This growth was related to trading activities and must be analyzed taking into consideration the trading revenues recorded in other income.

Other income for the quarter was $529 million as against $512 million for the three-month period ended October 31, 2004. Financial market fees totalled $166 million for the quarter, up $27 million over the corresponding quarter of 2004. Retail brokerage activities and the institutional sub-segment at Financial Markets were equally responsible for this increase. The portion of trading revenues recorded as other income rose $25 million from the fourth quarter of 2004. In addition, if net interest income related to trading activities is included, total trading revenues for the quarter were up $42 million. However, gains on investment account securities this quarter were $4 million versus the $51 million in gains recorded in the fourth quarter of 2004. Other than these items, the growth in other income stemmed from securitization revenues, which were up $11 million, and mutual funds and trust services, including private investment management, which rose $14 million.

Total revenues for fiscal 2005 reached $3,703 million compared to $3,545 million in 2004, for an increase of $158 million or 4.5%.

Net interest income, which represented 39% of all revenues, rose $74 million or 5.4%. At Personal and Commercial, net interest income was up 4% to $1,302 million, mainly as a result of the significant growth in loan volumes, while the spread narrowed 13 basis points, in particular on deposit transaction accounts. The $62 million increase in net interest income in the Financial Markets segment was attributable primarily to trading activities. Higher average volumes for securitized assets accounted for the $46 million decline in net interest income for the “Other” heading of segment disclosures.

In fiscal 2005, other income grew $84 million or 3.8% from 2004 to $2,266 million. Almost 60% of the increase was attributable to higher financial market fees resulting from the rise in the volume of transactions with individuals and financial market transactions. At $63 million for the year, card service revenues were up $14 million or 29%, driven by the increase in consumer spending. Securitization revenues rose $15 million or 8% in 2005 to $195 million, particularly from the securitization of additional credit card advances during the year. The appeal of the private investment management service coupled with higher volumes and values for mutual funds under management contributed to the growth of $41 million or 17% in trust service and mutual fund revenues, which reached $285 million in 2005. The $11 million decline in lending fees was due to the $25 million in revenues recorded in 2004 attributable to the change in the method of accounting for indemnities on mortgage loan prepayments. If this item were excluded, lending fees, which amounted to $247 million in 2005, would have increased 6%, chiefly owing to the resurgence in commercial credit operations.

Operating Expenses
Operating expenses for the fourth quarter of 2005 were $646 million compared to $623 million for the corresponding period of 2004, an increase of 3.7%. Salaries and staff benefits rose $29 million to $371 million for the quarter, representing 57% of operating expenses. The increase was attributable to staff benefit costs and incentive compensation as a result of the Bank’s excellent performance, especially compared to banking sector institutions. The $12 million decline in occupancy costs for the quarter versus the fourth quarter of 2004 was due to the charge for vacant space recorded last year. Professional fees for the quarter stood at $46 million, up $26 million principally as a result of development programs to support business strategies. Other expenses declined $21 million in the fourth quarter of 2005 as against the year-earlier period because of an additional expense for product promotion and customer loyalty programs in the fourth quarter of 2004.

In fiscal 2005, operating expenses were $2,499 million, up $111 million or 4.6% compared to $2,388 million the previous fiscal year. More than 80% of the increase was attributable to salaries and staff benefits, primarily variable compensation and incentive compensation, but also to higher staff benefit costs. Computer and equipment expenses and professional fees combined rose by almost 9% from 2004 to 2005 to $492 million. This increase was driven by the technology developments required to improve computer systems, optimize support operations and comply with regulatory requirements.

Income Taxes
Income taxes for the fourth quarter of 2005 totalled $72 million, representing an effective tax rate of 25.3%, compared to $77 million and an effective tax rate of 27.8% for the year-earlier period. For fiscal 2005, income taxes amounted to $291 million, for an effective tax rate of 24.9%, versus $318 million and an effective tax rate of 29.7% in 2004. Other than income tax reductions in certain jurisdictions and changes in sources of income, the lower effective tax rate in 2005 was also due to tax-efficient financial market transactions.

Results by Segment

Personal and Commercial
Net income for the Personal and Commercial segment totalled $112 million for the fourth quarter of 2005, up $14 million or 14% from the fourth quarter of 2004. Total revenues grew $20 million, or 4% to reach $528 million for the fourth quarter of 2005 compared to $508 million for the same period of 2004. Income for the Personal sub-segment was $12 million or 3.6% higher due to the $3.2 billion increase in average asset volumes, attributable to consumer loans, but also to residential mortgage loans and credit card advances. The increase in revenues stemming from the rise in loan volumes was partly offset by a nearly 15-basis point narrowing of the spread, in particular on transaction deposits. The $8 million or 4.6% revenue growth for the Commercial sub-segment was essentially attributable to the 5.5% or approximately $750 million increase in loans

and acceptances, while the sub-segment’s spread remained relatively stable. Operating expenses for the Personal and Commercial segment were $321 million for the fourth quarter of 2005 versus $316 million for the year-earlier period, an increase of less than 2%. Consequently, the efficiency ratio improved to 60.8% for the fourth quarter of 2005 compared to 62.2% for the same period in 2004. The segment’s allowance for credit losses declined $2 million to $38 million. The allowance for commercial loans decreased but was offset in part by an increase in the allowance for consumer loans.

For fiscal 2005, net income for the Personal and Commercial segment was $453 million, a $61 million or 16% increase over the previous fiscal year. The $3.5 billion or 8.8% advance in loans and acceptances as well as the growth in lending fees, card service revenues and foreign exchange revenues contributed to the $86 million or 4.4% increase in the segment’s total revenues of $2.1 billion for fiscal 2005. The improvement in the efficiency ratio from 62.0% in 2004 to 61.1% this year was achieved by containing the increase in operating expenses to 3% despite higher staff benefit and IT investment costs.

Credit losses in fiscal 2005 were $117 million, down $20 million, chiefly owing to commercial credit.

Wealth Management
Net income for the Wealth Management segment amounted to $27 million for the fourth quarter of 2005, up 17% from the $23 million posted for the corresponding quarter of 2004. Total Wealth Management revenues for the quarter were $206 million, up 14%

from the fourth quarter of 2004. Three fourths of the growth was generated by retail brokerage activities, while the remainder stemmed from mutual fund revenues. Operating expenses were up $18 million or 13% to $159 million for the quarter. One half of the increase stemmed from variable compensation and the other half from IT costs and professional fees.

The segment’s net income grew 15% in 2005 to reach $115 million as a result of the 8.6% increase in revenues, which stood at $807 million for the year. Retail brokerage, private investment management and mutual funds contributed to the growth in the segment’s revenues in 2005. The efficiency ratio went from 78.2% in 2004 to 76.7% in 2005, essentially due to the optimization of the cost structures of certain activities.

Financial Markets
Net income for the Financial Markets segment totalled $50 million for the fourth quarter of 2005 compared to $63 million for the year-earlier period. Total revenues for the quarter were $236 million, down $10 million from the same quarter in 2004, mainly as a result of smaller gains on securities, offset in part by trading revenues. Operating expenses for the quarter were $150 million, up 2% from the $147 million in the fourth quarter of 2004. The allowance for credit losses stood at $4 million, while a $2 million recovery had been recorded a year earlier.

Financial Market Revenues (1)
(millions of dollars)

Q4
2005

Q4
2004


2005


2004

  Interest rate

           30

             (2)

           71

           43

  Equity

           43

           59

          244

          190

  Commodity and foreign exchange

           10

            8

           28

           30

Trading revenues

           83

           65

         343

          263

Financial market fees

          73

          61

          302

          284

Banking services

            36

            41

           137

           190

Gains on securities

              7

            38

             56

           100

Other

          37

          41

           151

          147

Total

        236

        246

         989

         984

(1) Taxable equivalent basis is a calculation method that consists in grossing up certain tax-exempt income by the amount of income tax that otherwise would have been payable.  The use of the taxable equivalent basis is not in accordance with GAAP.  Securities regulators require that companies caution readers that measures adjusted on a basis other than GAAP do not have standardized meanings under GAAP and may not be comparable to similar measures used by other companies.  Please refer to Note 10 to the unaudited interim consolidated financial statements for particulars on the taxable equivalent adjustment to segment results.

For fiscal 2005, net income for the Financial Markets segment amounted to $250 million compared to $245 million the previous year. The favourable impact on results of the decrease in credit losses from $51 million in 2004 to $8 million in 2005 was offset by the almost 10% increase in operating expenses for the segment. Higher operating expenses and relatively stable revenues were due to revenues from activities with a higher variable compensation rate, costs for IT development and the integration of the National Bank Financial Group. Total revenues for the Financial Markets segment were $989 million in 2005 versus $984 million in 2004. Trading revenues advanced 30% to $343 million, driven by good market opportunities, and commission revenues grew by $18 million or 6% due to the increase in the volume of market transactions. These increases were offset by the $44 million decrease in gains on securities and the $53 million decline in banking service revenues from 2004 when the Bank had participated in several large transactions.

Other
The “Other” heading of segment results generated net income of $18 million for the fourth quarter of 2005 compared to $8 million for the year-earlier period. The increase was mainly due to securitization activities. For fiscal 2005, net income for the “Other” heading of segment results amounted to $37 million as against a net loss of $12 million for the same period last year. The variance was chiefly attributable to the $37 million gain ($25 million net of income taxes) on the disposal of investments in financial institutions in South America. In 2005, the Bank reversed a total of $42 million of the general allowance for credit risk versus $55 million in 2004, which reduced net income for the “Other” heading of segment results by $9 million, net of income taxes. The remainder of the variance was attributable to securitization activities.

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 fourth quarter of 2005, cash and cash equivalents declined $1.7 billion compared to a decrease of $1.6 billion for the fourth quarter of 2004. As at October 31, 2005, cash and cash equivalents totalled $6.3 billion versus $5.3 billion a year earlier.

Operating activities generated cash of $0.8 billion. The decrease in trading account securities generated $1.6 billion, which was partially offset by the $700 million increase in Other items, in particular amounts in the settlement process. For the corresponding quarter of 2004, operating activities required $0.1 billion.

Financing activities required cash flows of $2.5 billion due to an increase in securities sold short and securities sold under repurchase agreements. For the fourth quarter of 2004, the cash generated by financing activities was due to the decrease in securities sold short.

Lastly, funds used in investing activities in the fourth quarter of 2005 were negligible. For the corresponding period of 2004, investing activities required $2.6 billion mainly because of the increase in investment account securities.

Risk Management

Credit Risk
For the fourth quarter of 2005, the Bank recorded specific provisions for credit losses of $25 million, which were offset by the $25 million reversal of the general allowance for credit risk. In the corresponding quarter of 2004, an $8 million recovery of credit losses was recorded as a result of the $35 million reversal of the general allowance. Consequently, the provision for credit losses for fiscal 2005 was $33 million, representing a $42 million recovery of the general allowance and specific charges of $75 million. For 2004, the specific provisions were $141 million and the recovery of the general allowance was $55 million. The decrease of almost 50% in the specific provisions for 2005 was attributable to both commercial loans and corporate lending.

As at October 31, 2005, the allowance for credit losses exceeded impaired loans by $191 million compared to $190 million as at October 31, 2004, despite the $42 million reduction in the general allowance for credit risk. Moreover, impaired loans declined for all business lending segments. The general allowance for credit risk stood at $308 million as at October 31, 2005 versus $350 million a year earlier.

The ratio of gross private impaired loans to total adjusted capital and allowances was excellent at 6.8% as at October 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 following table 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
October 31, 2005

For the quarter ended
July 31, 2005

 

Period end

High

Average

Low

Period end

High

Average

Low

Interest rate

(3.5)

  (7.5)

  (4.8)

(2.7)

(6.1)

  (6.7)

  (4.7)

(2.8)

Foreign exchange

(0.9)

  (2.0)

  (0.9)

(0.2)

(1.7)

  (2.2)

  (1.3)

(0.5)

Equity

(5.1)

  (5.1)

  (4.3)

(2.8)

(3.8)

   (4.7)

  (3.5)

(2.4)

Commodity

(0.6)

  (0.9)

  (0.6)

(0.5)

(0.8)

  (0.9)

  (0.7)

(0.6)

Correlation effect(2)

5.0

   7.6

   4.8

  2.1

5.5

   6.5

   4.4

  2.3

Global VaR

(5.1)

  (7.9)

  (5.8)

(4.1)

(6.9)

  (8.0)

  (5.8)

(4.0)

(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 October 31, 2005, the Bank’s assets stood at $107.6 billion compared to $88.7 billion as at October 31, 2004. Loans and acceptances were up $5.8 billion. Moreover, cash, deposits with financial institutions, securities and securities purchased under reverse repurchase  agreements rose $12.1 billion. The following table presents the main portfolios.

Average monthly volumes
(millions of dollars)

October
2005

October
2004

Loans and acceptances*

 

 

Residential mortgages

20,728

19,554

Consumer loans

8,283

6,491

Credit card receivables

1,707

1,589

SME loans

15,133

14,339

Corporate loans

3,216

2,922

 

49,067

44,895

Deposits

 

 

Personal (balance)

26,385

24,008

Off-balance sheet personal savings (balance)

63,262

57,207

Business

11,103

10,668

*including securitized assets

As at October 31, 2005, residential mortgage loans amounted to $20.7 billion, up $1.2 billion or 6% compared to October 31, 2004 as a result of the solid performance of the residential real estate sector in the Bank’s main market. At $8.3 billion, consumer loans were up 28%, with approximately 40% of this strong growth attributable to volumes from partnerships and the remainder to secured lines of credit. The increase in consumer spending contributed to the growth in the volume of credit card receivables, which rose 7.4% over the year to $1.7 billion as at October 31, 2005.

Businesses started using bank credit again as evidenced by the $0.8 billion or 5.5% rise in outstanding loans to small and medium-sized enterprises as at October 31, 2005, while corporate loans increased by approximately $300 million during the year to $3.2 billion at the end of the year.

Personal deposits stood at $26.4 billion as at October 31, 2005, up $2.4 billion or 10% compared to October 31, 2004, primarily due to deposits distributed by the subsidiary Altamira. Off-balance sheet personal savings administered by the Bank as at October 31, 2005 totalled $63.3 billion, an increase of $6.1 billion or 11% since the end of the previous fiscal year. Two thirds of the growth was attributable to savings administered by brokerage subsidiaries with the remainder due to private investment management and mutual funds.

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 judgments 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

Variable interest entities
On November 1, 2004, the Bank adopted Accounting Guideline No. 15 “Consolidation of Variable Interest Entities” (AcG-15) issued by the Canadian Institute of Chartered Accountants (CICA). This Guideline provides guidance on the application of the standards set out in CICA Handbook Section 1590 “Subsidiaries” to certain entities defined as variable interest entities (“VIEs”). VIEs are entities in which equity investors do not have a 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, defined as the party that receives the majority of the expected residual returns and/or that absorbs the majority of the entity’s expected losses. The application of the provisions of AcG-15 on November 1, 2004 resulted in the consolidation of certain mutual funds in which the Bank has a significant investment and the consolidation of the VIE that leases the Bank’s head office building under a capital lease. The impact of the application of this standard was an increase in “Premises and equipment” of $84 million, “Securities” of $48 million, “Other assets” of $3 million, “Other liabilities” of $90 million, “Non-controlling interest” of $44 million, and “Retained earnings” of $1 million. Prior period consolidated financial statements have not been restated for this change.

Investment companies
Effective November 1, 2004, the Bank has applied Accounting Guideline No. 18 “Investment Companies” (AcG-18). Under this Guideline, investment companies that satisfy certain criteria are required to account for all their investments at fair value, including investments that would otherwise be consolidated or accounted for using the equity method. The impact of the adoption of this new Guideline on the consolidated financial statements for the 2005 fiscal year is negligible.

Future Changes in Accounting Policies

Financial Instruments – Recognition and Measurement, Hedges and Comprehensive Income
In January 2005, the CICA issued three new accounting standards: “Financial Instruments – Recognition and Measurement,” “Hedges” and “Comprehensive Income.” These standards provide guidance on the recognition and measurement of financial assets, financial liabilities and non-financial derivatives.

They also provide guidance on the classification of financial instruments and standards on hedge accounting (see Note 3 to the unaudited interim consolidated financial statements).

These new standards will apply to the Bank effective November 1, 2006. The impact of implementing these new standards on the Bank’s consolidated financial statements cannot yet be determined as it is dependent on the Bank's unsettled positions and hedging strategies and on market volatility at the time of transition.

Capital

Tier 1 and total capital ratios, according to the rules of the Bank for International Settlements, were 9.6% and 12.8%, respectively, as at October 31, 2005, taking into account the $500 million debenture issued on November 2, 2005, compared to 9.6% and 13.0% as at October 31, 2004.

During the first quarter of 2005, the Bank issued $350 million of subordinated debentures and redeemed the same amount in the third quarter. On March 15, 2005, the Bank issued 8,000,000 Non-Cumulative Fixed Rate First Preferred Shares Series 16 to take advantage of the current market conditions which allowed the Bank to issue the shares at a rate considerably lower than the 6.15% fixed rate that would likely have been the rate at which dividends would have been paid on the 7,000,000 Non-Cumulative First Preferred Shares Series 13 after August 15, 2005. The Bank ceased to take into account the Non-Cumulative First Preferred Shares Series 13 as Tier 1 capital for capital adequacy purposes effective March 15, 2005, the date on which the Non-Cumulative Fixed Rate First Preferred Shares Series 16 were issued. The Bank redeemed the Non-Cumulative First Preferred Shares Series 13 on August 15, 2005. In October 2005, the Bank converted a US $250 million debenture into deposit notes.

During fiscal 2005, the Bank repurchased 4.2 million common shares for a total of $224 million as part of a normal course issuer bid to repurchase up to 8.4 million shares commenced on January 13, 2005.

In addition, risk-weighted assets rose by $5.4 billion or 13%, chiefly because of higher loan volumes.

Dividends

At its meeting on December 8, 2005, the Board of Directors declared regular dividends on the various classes and series of preferred shares as well as a dividend of 48 cents per common share payable on February 1, 2006 to shareholders of record on December 29, 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 2005-2006
First quarter: March 2, 2006
Second quarter: May 25, 2006
Third quarter: August 31, 2006     
Fourth quarter: November 30, 2006

DISCLOSURE OF 4TH QUARTER 2005 RESULTS

Conference Call
·  A conference call for analysts and institutional investors will be held on December 8, 2005 at 2:00 ET.
· Access by telephone in listen only mode: 1-866-898-9626 or (416) 340-2216
·  A recording of the conference call can be heard until December 15, 2005 by calling 1-800-408-3053 or (416) 695-5800.  The access code is 3167522.

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 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.

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 close to $108 billion in assets and, together with its subsidiaries, employs 16,890 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 information:

Pierre Fitzgibbon
Senior Vice-President - Finance, Technology and Corporate Affairs
(514) 394-8610

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

Fourth Quarter 2005

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