Press Releases

National Bank announces net income of $217 million for the first quarter of 2006

Montreal, 2 March 2006 -

·  Earnings per share of $1.28;
· 
Return on common shareholders’ equity of 19.9%;
·  Higher revenues and net income at all three of the Bank’s business segments.

 

For the quarter
ended January 31

 

(millions of dollars)

2006

2005

%

Net income

 

 

 

Personal and Commercial

              114

               112

   +2

Wealth Management

               38

                 26

 +46

Financial Markets

               82

                 76

  +8

Other

             (17)

               -

     -

Subtotal

             217

               214

   +1

Gain on disposal of investments in South America

               -

              25

 

Total

217

            239

-9

Earnings per share

Less: gain on disposal of investments in South America

$1.28

   -

$1.39

                    (0.15)

    -8

 

Earnings per share excluding gain on disposal of investments

$1.28

$1.24

+3

Return on common shareholders’ equity

         19.9%

23.6%

 

MONTREAL, March 2, 2006 National Bank reported net income of $217 million for the first quarter of fiscal 2006, compared to $239 million for the corresponding period of 2005. Earnings per share for the quarter totalled $1.28, as against $1.39 for the same quarter a year earlier. Had it not been for the gain on the disposal of investments in South America in the first quarter of 2005, earnings per share for the first quarter of 2006 would have been 3% higher than the year-earlier period. Return on common shareholders’ equity was 19.9% for the first quarter of 2006 versus 23.6% for the corresponding quarter of 2005 or 21.1%, excluding the gain on the disposal of South American investments.

Wealth Management and Financial Markets made significant contributions throughout the quarter. “Wealth Management recorded solid net income growth on the strength of our trust operations and mutual funds. In addition, the improvement in the efficiency ratio enabled Financial Markets to post strong profitability growth in a context of stable revenues,” stated Réal Raymond, President and Chief Executive Officer.

Results by Segment

Net income for the Personal and Commercial segment totaled $114 million for the first quarter of 2006, up 2% from $112 million in the corresponding quarter of 2005. The segment recorded sustained growth in total revenues, which was attributable to insurance and foreign exchange activities and an increase in net interest income primarily owing to higher loan volumes. Operating expenses rose chiefly because of the higher cost of salaries and staff benefits, as well as IT development expenses. The segment’s contribution before the provision for credit losses and income taxes was $203 million for the quarter, up 3.6% from the same quarter a year earlier. This growth was not, however, fully reflected in net income because of the increase in the provision for credit losses.

Wealth Management net income climbed to $38 million, up 46% from the $26 million recorded for the corresponding period of 2005. Total revenues advanced 11%, owing to increased activity in each of the segment’s business units. Operating expenses rose only slightly, making it possible to lower the efficiency ratio from 78.6% in the first quarter of 2005 to 72.4% this quarter.

Financial Markets posted net income of $82 million for the first quarter of 2006 compared to $76 million for the corresponding quarter of 2005. This 8% increase was due primarily to lower operating expenses, as the segment’s total revenues for the first quarter of 2006 were virtually unchanged from the year-earlier period.

“Once again, our segment diversification strategy has proven its capacity to generate results,” added Mr. Raymond. “The contribution of the Personal and Commercial segment, still very strong, accounts for half of the Bank’s net income, while Wealth Management and Financial Markets together make up the remainder. This well-balanced strategy will stand us in good stead for the long term.”

Credit Risk

For the first quarter of 2006, the Bank recorded a $17 million specific provision for credit losses, the same amount taken for the year-earlier period. As at January 31, 2006, gross impaired loans stood at $259 million versus $260 million at the end of fiscal 2005. The ratio of gross impaired loans to total adjusted capital and allowances was excellent at 6.7%. Allowances for credit losses at the end of the first quarter of 2006 exceeded gross impaired loans by $195 million compared to $191 million as at October 31, 2005.

Regulatory Capital

As at January 31, 2006, Tier 1 and total capital ratios stood at 9.5% and 12.7%, respectively, compared to 9.6% and 12.8% as at October 31, 2005, taking into account the $500 million debenture issued on November 2, 2005. During the quarter, the Bank repurchased 1.8 million common shares, at a total cost of $107 million, as part of two normal course issuer bids. The issuer bid that expired on January 12, 2006 was replaced with a new repurchase program on January 23, under which the Bank seeks to repurchase 8.3 million common shares. The target repurchase under the previous program was 8.4 million common shares.

Financial objectives

 

Objectives

Results
1st quarter
2006

Growth in earnings per share excluding the gain on disposal of investments in 2005

      5% - 10%

3%

Return on common shareholders’ equity

    16% - 18%

19.9%

Tier 1 capital ratio

More than 8.5%

9.5%

Dividend payout ratio

35% - 45%

37%


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

March 2, 2006 — 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 Multilateral Instrument 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 2006. Additional information about National Bank of Canada, including the Annual Information Form, can be obtained from the SEDAR website at www.sedar.com and the Bank’s website at www.nbc.ca.

Analysis of Results

Consolidated Results

National Bank recorded net income of $217 million in the first quarter of fiscal 2006, compared to $239 million for the corresponding period of 2005. Excluding the gain on the disposal of investments in South America in the first quarter of 2005, net income would have been 1% higher over the same reference period.

Earnings per share reached $1.28 in the first quarter of 2006, as against $1.39 for the year-earlier period. Had it not been for the gain on the disposal of investments, earnings per share would have been 3% higher than in the corresponding quarter of 2005.

Total Revenues
At $979 million, the Bank’s total revenues remained relatively stable from the $983 million reported a year earlier. Excluding the $37 million pre-tax gain on the disposal of investments in South America, revenue growth amounted to 4% for the period.

Personal and Commercial net interest income advanced $14 million, or 4.3%, to $337 million for the quarter, owing to higher volumes of consumer and business loans. The spread, which had been narrowing in recent quarters, was stable in the first quarter of 2006 compared to the fourth quarter of 2005.

Taking net interest income and other income into account, trading revenues rose $11 million to $93 million in the first quarter of 2006, primarily due to equity securities. Gains on investment account securities totalling $42 million were down by $35 million because of the gain on the disposal of investments in South America posted in the first quarter of 2005.

Other income from mutual funds and trust services, including Private Investment Management, increased $16 million from the first quarter of 2005 to reach $81 million in the first quarter of 2006. The increase in other income also stemmed from lending fees and foreign exchange revenues, which rose $4 million and $5 million respectively. Securitization revenues, however, amounted to $40 million for the quarter, compared to $48 million in the first quarter of 2005. Financial market fees totalled $159 million in the first quarter of 2006, as against $169 million in the first quarter of 2005, due to a decline in corporate financing.

Operating Expenses
Operating expenses for the first quarter of 2006 were $644 million, up $31 million from the $613 million recorded for the corresponding quarter of 2005. Salaries and staff benefits rose $12 million to $379 million in the first quarter of 2006, representing 59% of operating expenses. The increase was attributable to higher salaries and the cost of staff benefits, owing chiefly to the rise in pension plan costs. Technology expenses were up $9 million to $93 million in the first quarter of 2006. This increase, together with the $5 million increase related to professional fees, stemmed from programs currently being developed to support the business strategy. Lastly, other expenses were $4 million higher in the first quarter of 2006 than in the corresponding period of 2005, mainly due to advertising expenses.

Income Taxes
Income taxes for the first quarter of 2006 totalled $93 million, representing an effective tax rate of 29.2%, compared to $107 million and an effective tax rate of 30.3% for the year-earlier period.

Results by Segment

Personal and Commercial
Net income for the Personal and Commercial segment totaled $114 million for the first quarter of 2006, up 2% from $112 million in the corresponding quarter of 2005. Total revenues grew 5.4% to reach $529 million. Total revenues for Personal Banking were $18 million or 5.4% higher due to the $3.2 billion increase in average asset volumes, mainly attributable to consumer loans, but also to residential mortgages and credit card advances. The increase in revenues stemming from the rise in loan volumes was partly offset by the narrower spread on these lending activities. By contrast, the spread on transaction deposits widened due to a rise in interest rates. Insurance revenues rose by 12% at an annualized rate. The $9 million or 5.3% total revenue growth for Commercial Banking was attributable to higher net interest income from the increase in loans and bankers’ acceptances as well as foreign exchange revenues, while the spread held steady. Operating expenses for the Personal and Commercial segment were $326 million for the first quarter of 2006 versus $306 million for the year earlier period, for an increase of 6.5%. Consequently, the efficiency ratio edged up to 61.6% for the first quarter of 2006 from 61.0% for the same period in 2005. The segment’s provision for credit losses rose $4 million to $31 million, with provisions for credit cards accounting for over half of the increase.

Wealth Management
Net income for the Wealth Management segment climbed to $38 million for the first quarter of 2006, an increase of 46% versus the $26 million posted in the corresponding quarter of 2005. Total Wealth Management revenues for the quarter were $214 million, up 12% from the first quarter of 2005. Each of the segment’s business units contributed to the increase in revenues. Operating expenses were up $4 million or 3% to $155 million for the quarter largely due to IT costs and professional fees.

Financial Markets
The Financial Markets segment posted net income of $82 million for the first quarter of 2006 compared to $76 million for the year-earlier period. Total revenues for the quarter were $277 million, an increase of $5 million over the same quarter in 2005. Changes in the revenue mix accounted for the substantially higher trading revenues and gains on securities in the first quarter of 2006. Financial market fees and revenues from banking services for corporate clients declined however. Operating expenses to the quarter were $151 million, down 2% from $154 million in the first quarter of 2005. The provision for credit losses stood at $1 million as against
$2 million in the corresponding quarter of 2005.

Financial Market Revenues
(taxable equivalent basis (1))
(millions of dollars)

Q1
2006

Q1
2005

Trading revenues

 

 

  Equity

           70 

           58

  Interest rate

           13

           17

  Commodity and foreign exchange

7

3

 

           90

           78

Financial market fees

          65

           75

Gains on securities

            42

            35

Banking services

            33

            43

Other

          47

          41

Total

        277

        272

(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 by other companies. Please refer to Note 10 to the unaudited interim consolidated financial statements for the impact of the taxable equivalent adjustment to segment results.

Other
The “Other” heading of segment results recorded a net loss of $17 million for the first quarter of 2006 compared to net income of $25 million for the year-earlier period. The variance was chiefly attributable to the $37 million gain ($25 million net of income taxes) on the disposal of investments in South Americain the first quarter of 2005. In addition, gains from securitization activities were down by $14 million, and operating expenses not allocated to the business segments were up.

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 in certain activities, such as trading activities, and could impact several assets and liabilities such as trading account securities, securities sold short or securities sold under repurchase agreements.

For the first quarter of 2006, cash and cash equivalents increased $2.2 billion compared to an increase of $1.3 billion for the first quarter of 2005. As at January 31, 2006, cash and cash equivalents totalled $8.5 billion versus $6.6 billion the previous year.

Operating activities provided cash of $4.0 billion because of the $3.4 billion decrease in trading account securities. For the corresponding quarter of 2005, operating activities required cash flows of $0.9 billion.

Financing activities required cash of $2.8 billion due to the decrease in securities sold short and securities sold under repurchase agreements partly offset by an increase of deposits of $2.9 billion. For the year-earlier quarter, cash inflows of $4.1 billion were mainly attributable to deposit activities and securities sold short. 

Finally, investing activities in the first quarter of 2006 provided cash of $1.0 billion. Investing activities in the corresponding quarter of 2005 required $1.9 billion.

Risk Management

Credit Risk

In the first quarter of 2006, the Bank recorded specific provisions for credit losses of $17 million, the same amount taken in the corresponding quarter of 2005. Gross impaired loans stood at $259 million as at January 31, 2006, compared to $260 million at the end of fiscal 2005. The ratio of gross impaired loans to total adjusted capital and allowances was excellent at 6.7%. As at January 31, 2006, allowances for credit losses exceeded gross impaired loans by $195 million versus $191 million as at October 31, 2005, a $4 million improvement. The decrease was largely attributable to our Real Estate sector. However, the increase in impaired commercial loans partly offset this positive effect.

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 61 of the 2005 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, 2006

For the quarter ended
October 31, 2005

 

Period end

High

Average

Low

Period end

High

Average

Low

Interest rate

(5.2)

(7.2)

(3.7)

(1.8)

(3.5)

  (7.5)

  (4.8)

(2.7)

Foreign exchange

(1.9)

(2.8)

(1.8)

(0.6)

(0.9)

  (2.0)

  (0.9)

(0.2)

Equity

(6.1)

(6.2)

(4.7)

(3.0)

(5.1)

  (5.1)

  (4.3)

(2.8)

Commodity

(1.6)

(2.3)

(1.2)

(0.5)

(0.6)

  (0.9)

  (0.6)

(0.5)

Correlation effect(2)

5.7

8.3

5.6

1.8

5.0

  7.6

   4.8

  2.1

Global VaR

(9.1)

 10.2)

  (5.8)

(4.1)

(5.1)

 (7.9)

  (5.8)

(4.1)

(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, 2006, the Bank had assets of $105.3 billion compared with $107.6 billion at the end of fiscal 2005. Loans and acceptances were up $875 million or 2%. In addition, cash, deposits with financial institutions, securities and securities purchased under reverse repurchase agreements decreased $2.8 billion. The table opposite presents the main portfolios.

Average monthly volumes
(millions of dollars)

January
2006

October
2005

January
2005

Loans and acceptances*

 

 

 

Residential mortgages

20,917

20,728

19,846

Consumer loans

8,537

8,283

6,748

Credit card receivables

1,734

1,707

1,652

SME loans

14,568

14,182

13,405

Corporate loans

3,346

3,216

2,707

 

49,102

48,116

44,358

Deposits

 

 

 

Personal (balance)

27,103

26,385

24,610

Off-balance sheet personal savings (balance)

66,993

63,262

59,527

Business

10,978

11,103

10,485

*including securitized assets

Residential mortgage loans rose steadily during the first quarter of 2006, with the average monthly volume reaching $20.9 billion as against $19.8 billion in the first quarter of 2005. Consumer loans climbed 27% to $8.5 billion, driven by volumes from partnerships and secured lines of credit. The rise in credit card receivables, which were up 5.0% over the previous year to total $1.7 billion as at January 31, 2006, was attributable to increased consumer spending. Business loans continued to grow in the first quarter, with SME loans up 8.7% year over year, representing an average volume of $14.6 billion in the first quarter of fiscal 2006. Average volumes of corporate loans, for their part, rose 23.6% to $3.3 billion.

Personal deposits stood at $27.1 billion as at January 31, 2006, up $2.5 billion or 10.1% from the corresponding quarter of 2005, chiefly owing to deposits distributed by Altamira. Off-balance sheet personal savings administered by the Bank as at January 31, 2006 totalled $67.0 billion, an increase of $7.5 billion or 13% in a year. The rise was primarily attributable to savings administered by brokerage subsidiaries, with the remainder divided between Private Investment Management and mutual funds.

Accounting Policies and Estimates

The interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“GAAP”). The reader is referred to Note 1 and Note 2a to the 2005 annual consolidated financial statements for more information on the significant accounting policies used to prepare financial statements.

There have not been any changes to the Bank’s significant accounting policies affecting this quarter.

Details of significant future changes in accounting standards are presented in Note 2 to the interim consolidated financial statements.

The key assumptions and bases for estimates made by Management in accordance with GAAP and their impact on amounts presented in the interim consolidated financial statements and notes remain essentially unchanged from those described in the 2005 Annual Report.

Capital

Tier 1 and total capital ratios, according to the rules of the Bank for International Settlements, stood at 9.5% and 12.7%, respectively, as at January 31, 2006 versus 9.6% and 12.8% as at October 31, 2005, including the $500 million debenture issued on November 2, 2005. During the quarter, the Bank repurchased 1,771,600 common shares under its normal course issuer bid which ended on January 12, 2006, for a total of $106.1 million. 

On January 23, 2006, the Bank launched a normal course issuer bid to repurchase for cancellation a maximum of 8,278,000 common shares during the 12-month period ending January 22, 2007. As at January 31, 2006, a total of 20,500 shares had been repurchased for $1.3 million.

In addition, risk-weighted assets rose $3.3 billion or 7.6% chiefly because of higher loan volumes.

Dividends

At its meeting on March 2, 2006, 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 May 1, 2006 to shareholders of record on March 30, 2006.

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
Second quarter: May 25, 2006
Third quarter: August 31, 2006
Fourth quarter: November 30, 2006

DISCLOSURE OF 1st QUARTER 2006 RESULTS

Conference Call
·  A conference call for analysts and institutional investors will be held on March 2, 2006 at 1:00 p.m. ET.
·  Access by telephone is 1-866-898-9626 or (416) 340-2216
·  A recording of the conference call can be heard until March 9, 2006 by calling 1-800-408-3053 or (416) 695-5800.  The access code is 3176654#.

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 or telephone numbers below.

National Bank Trust Inc.
Share Ownership Management
1100 University, 12th 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 elect to have their dividend payments deposited directly via electronic funds transfer to their bank account at any financial institution that is a member of the Canadian Payments Association. To do so, they must send a written request to the Transfer Agent, National Bank Trust Inc.

Dividend Reinvestment and Share Purchase Plan

National Bank offers holders of its common shares a Dividend Reinvestment and Share Purchase Plan through which they can invest in common shares of the Bank without paying a commission or administration fee. Participants in the Plan may acquire shares by reinvesting cash dividends paid on shares they hold or by making optional cash payments of at least $500 per payment, to a maximum of $5,000 per quarter. For additional 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 more than $105 billion in assets and, together with its subsidiaries, employs 16,993 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:

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

Denis Dubé
Director
Public Relations
(514) 394-8644

Hélène Baril
Director
Investor Relations
(514) 394-0296

First Quarter 2006

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