National Bank Financial Group
TSX : NA

National Bank Financial Group

August 26, 2010 07:00 ET

National Bank of Canada Releases its Results for the Third Quarter of 2010

MONTREAL, QUEBEC--(Marketwire - Aug. 26, 2010) - National Bank Financial Group (TSX:NA) - The financial information in this press release is based on the unaudited interim consolidated financial statements for the third quarter and the nine-month period ended July 31, 2010. 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.

Highlights:

  • Net income of $271 million in the third quarter of fiscal 2010 compared to net income of $303 million in the third quarter of 2009;
  • Diluted earnings per share of $1.56 for the third quarter of 2010 compared to diluted earnings per share of $1.78 for the same quarter of 2009;
  • Return on equity of 17.7%;
  • Tier 1 capital ratio of 13.0% as at July 31, 2010 compared to 10.7% as at October 31, 2009.

Highlights excluding specified items(1):

  • Net income of $273 million in the third quarter of 2010 compared to net income of $304 million in the third quarter of 2009;
  • Diluted earnings per share of $1.57 for the third quarter of 2010 compared to $1.79 for the same quarter of 2009;
  • Return on equity of 17.7%.

(1) The financial reporting method is explained in detail on page 5.

National Bank of Canada reports net income of $271 million in the third quarter of fiscal 2010 compared to net income of $303 million in the third quarter of 2009. Diluted earnings per share for the quarter ended July 31, 2010 stood at $1.56 versus $1.78 for the same quarter of 2009. Excluding specified items, net income for the third quarter of 2010 would have been $273 million versus $304 million in the third quarter of 2009, and diluted earnings per share would have been $1.57 in the third quarter of 2010 versus $1.79 in the same quarter of 2009. The specified items of $2 million, net of income taxes, for the third quarter of 2010 and the specified items of $1 million, net of income taxes, for the third quarter of 2009 are related to the holding of restructured notes.

The Bank's net income for the first nine months of fiscal 2010 totalled $747 million, up 22% from $613 million in the same nine-month period of 2009. Diluted earnings per share stood at $4.28 for the first nine months of fiscal 2010, up $0.73 or 21% from $3.55 in the same nine-month period of 2009. Excluding the specified items described on page 5, net income for the first nine months of fiscal 2010 would have been $802 million, down 2% from $818 million in the first nine months of 2009. Diluted earnings per share would have been $4.62 for the first nine months of fiscal 2010 compared to $4.83 for the first nine months of fiscal 2009.

"The third quarter results demonstrated excellent performance in the Personal and Commercial segment and a credit portfolio of good quality. Despite less favourable conditions for trading activities, the Financial Markets segment maintained sound profitability. Our diversified business model and the One client, one bank program continue to prove their worth," stated Louis Vachon, President and Chief Executive Officer.

Results by Segment

Personal and Commercial

Net income for the Personal and Commercial segment rose 32% to total $162 million in the third quarter of 2010. Total revenues for the Personal and Commercial segment increased by $35 million to total $621 million, mainly due to the segment's growth in net interest income, which rose $29 million to total $380 million for the third quarter of 2010. This growth came mainly from a solid increase in personal and commercial loans, as the net interest margin remained stable at 2.46% compared to the same quarter of 2009.

Total revenues at Personal Banking amounted to $418 million, a $23 million increase arising mainly from higher loan volumes, partly offset by a narrowing of net interest margins on deposits. Total revenues at Commercial Banking were $203 million, a $12 million increase owing mainly to higher loan volumes and higher acceptances and lending fees.

Operating expenses for the Personal and Commercial segment remained steady at $346 million in the third quarter of 2010. As a result, the efficiency ratio was 56% for the third quarter of 2010 compared to 59% for the same quarter of 2009. The segment's provision for credit losses was $45 million, a $9 million reduction that is mainly attributable to commercial loans.

For the first nine months of fiscal 2010, the Personal and Commercial segment's net income stood at $442 million, a $68 million increase from the $374 million in net income recorded during the same period in 2009. Total revenues for the segment rose 6% to total $1,805 million. Total revenues at Personal Banking grew $81 million or 7%, mainly due to higher loan volumes. Total revenues for Commercial Banking rose $22 million or 4%. The segment's provision for credit losses was $6 million higher than in the same nine-month period of 2009, for an increase attributable to losses on credit card receivables and personal loans. The efficiency ratio fell to 56% for the first nine months of fiscal 2010 compared to 59% for the same nine-month period of 2009.

Wealth Management

Net income for the Wealth Management segment totalled $28 million in the third quarter of 2010, up $2 million or 8% from $26 million in the same quarter of 2009. Total revenues were $187 million compared to $186 million in the third quarter of 2009. Net interest income rose $2 million or 7%, and other income decreased by $1 million. Assets under management and administration increased over the third quarter of 2010, generating growth in trust service and mutual fund revenues. This increase was offset by lower commission revenues as brokerage activity dipped slightly. Owing to strict cost control, operating expenses fell by $3 million to stand at $146 million in the third quarter of 2010.

For the first nine months of fiscal 2010, net income for Wealth Management totalled $79 million compared to $87 million in the same period of 2009. Total revenues for the segment stood at $574 million, as against $566 million in the same period of 2009, primarily due to other income, which was up $31 million or 7% owing to robust brokerage activities and mutual fund revenues and tempered by the narrower net interest margin on deposits. Operating expenses increased $18 million year-over-year to stand at $453 million. The increase in salaries and variable compensation was due to higher revenues from personal securities brokerage commissions, as brokerage activity rebounded.

Financial Markets

The Financial Markets segment posted net income of $98 million in the third quarter of 2010, down $72 million from the same quarter of 2009 when market conditions favoured trading activity. On a taxable equivalent basis, total revenues stood at $313 million compared to $405 million in the third quarter of 2009. Including revenues adjusted for non-controlling interest related to trading activities, third quarter revenues totalled $319 million compared to $410 million for the same quarter of 2009. On a taxable equivalent basis, trading activity revenues stood at $88 million for the quarter, down $78 million from the year-earlier quarter, as revenues from all types of activity were down due to the highly favourable financial market conditions that characterized the third quarter of 2009. Only financial market fee revenues rose 12%, totalling $65 million, and revenues from banking services were stable compared to the third quarter of 2009. The decrease in Other revenues from Financial Markets was mainly due to a $14 million lower contribution from a company subject to significant influence, Maple Financial Group Inc., offset by higher revenues from Credigy Ltd.

Operating expenses for the quarter stood at $177 million, up $17 million from the third quarter of 2009. The increase was mainly due to higher salaries and staff benefits as well as to transaction-related expenses. For the third quarter of 2010, the segment recorded a $4 million recovery in the provision for credit losses compared to an $8 million provision in the year-earlier quarter, for a decrease of $12 million that was due to the recovery of manufacturing sector loans.

For the first nine months of fiscal 2010, the segment's net income totalled $367 million, a slight $1 million increase from the same period in 2009. Total revenues on a taxable equivalent basis stood at $1,029 million compared to $1,018 million for the first nine months of fiscal 2009. Including revenues adjusted for non-controlling interest related to trading activities, the revenues from Financial Markets totalled $1,035 million, up $3 million from the first nine months of fiscal 2009. This increase consists primarily of higher revenues from all non-trading activities, which are benefitting from the recovery seen in the financial markets during the first six months of fiscal 2010. Operating expenses stood at $502 million, a $12 million increase from the first nine months of fiscal 2009. The segment recorded no provision for credit losses for the first nine months of fiscal 2010, a $19 million decrease from the same year-earlier period. This decrease was mainly due to the recovery of credit losses realized during the first nine months of fiscal 2010.

Other

The Other heading of segment results posted a net loss of $17 million in the third quarter of 2010 versus a net loss of $16 million in the same quarter of 2009. Charges related to holding MAV notes were negligible for the third quarters of 2010 and 2009. Excluding specified items, the net loss for the Other heading for the third quarter of 2010 and the third quarter of 2009 was $15 million. For the third quarter of 2010, the decrease in revenues from securitization activities was offset by a gain on the sale of MasterCard shares.

For the first nine months of fiscal 2010, the net loss was $141 million compared to a $214 million net loss for the same period of fiscal 2009. The difference was mainly due to the charges arising from the impact of MAV notes. During the first nine months of fiscal 2010, an administrative penalty of $75 million was recorded, and for the same period of 2009, $119 million in charges, net of income taxes, related to holding MAV notes and an $86 million charge, net of income taxes, related to commitments to extend credit to clients holding MAV notes, were recorded. Excluding specified items, the net loss for the first nine months of fiscal 2010 was $86 million compared to a $9 million net loss for the same period in 2009. The difference is mostly attributable to lower revenues from securitization activities.

Capital

Since November 1, 2009, the Bank has been applying the Advanced Internal Rating-Based Approach (AIRB Approach) for credit risk; before that date, it was using the Standardized Approach. For operational risk, the Bank is using the Standardized Approach and, for market risk, it continues to use the models and the Standardized Approach in accordance with the Basel II Accord.

According to the rules of the Bank for International Settlements (BIS)—Basel II—and using the AIRB Approach for credit risk, the Tier 1 capital ratio and the total capital ratio stood at 13.0% and 16.4%, respectively, as at July 31, 2010; as at October 31, 2009, under the Standardized Approach of Basel II, these same ratios were 10.7% and 14.3%, respectively. This increase in the capital ratios was largely due to the Bank's adoption of the AIRB Approach as well as to growth in retained earnings.

The risk-weighted assets calculated under the rules of Basel II decreased and amounted to $51.4 billion as at July 31, 2010 compared to $58.6 billion as at October 31, 2009.

                 
                 
Financial Indicators                
      Results       Results  
      excluding   Results   excluding  
  Results   specified   Nine months   specified  
  Q3 2010   items(1)   2010   items(1)  
   
Growth in diluted earnings per share (12 )% (12 )% 21  % (4 )%
Return on common shareholders' equity 17.7  % 17.7  % 16.6  % 17.8  %
Tier 1 capital ratio under Basel II 13.0  % 13.0  % 13.0  % 13.0  %
Dividend payout ratio 40  % 39  % 43  % 41  %
   
(1) See "Financial Reporting Method" on page 5.  
   
   
   
   
HIGHLIGHTS                        
                         
(unaudited) (millions of dollars)                        
                         
    Quarter ended         Nine months ended      
   July 31, 2010    July 31, 2009   % Change    July 31, 2010    July 31, 2009   % Change  
Operating results                                
Total revenues $ 1,054   $ 1,132   (7 ) $ 3,183   $ 3,039   5  
Total revenues adjusted for non-controlling interest(1)   1,060     1,137   (7 )   3,189     3,053   4  
Net income   271     303   (11 )   747     613   22  
Return on common shareholders' equity   17.7 %   22.1 %       16.6 %   15.2 %    
Per common share (dollars)                                
Earnings – basic $ 1.57   $ 1.79   (12 ) $ 4.32   $ 3.56   21  
Earnings – diluted   1.56     1.78   (12 )   4.28     3.55   21  
EXCLUDING SPECIFIED ITEMS(2)                                
Operating results                                
Total revenues $ 1,057   $ 1,138   (7 ) $ 3,191   $ 3,216   (1 )
Total revenues adjusted for non-controlling interest(1)   1,063     1,143   (7 )   3,197     3,230   (1 )
Net income   273     304   (10 )   802     818   (2 )
Return on common shareholders' equity   17.7 %   21.3 %       17.8 %   20.0 %    
Per common share (dollars)                                
Earnings – basic $ 1.58   $ 1.80   (12 ) $ 4.66   $ 4.84   (4 )
Earnings – diluted   1.57     1.79   (12 )   4.62     4.83   (4 )
Per common share (dollars)                                
Dividends declared $ 0.62   $ 0.62       $ 1.86   $ 1.86      
Book value                   36.01     32.51      
Stock trading range                                
  High   62.69     58.11         64.62     58.11      
  Low   54.45     43.36         54.45     25.62      
  Close   58.99     58.11         58.99     58.11      
             
             
  As at July 31, 2010   As at October 31, 2009   % Change  
Financial position            
Total assets $ 146,352   $ 132,138   11  
Loans and acceptances(3) 62,428   58,370   7  
Deposits 81,626   75,170   9  
Subordinated debentures and shareholders' equity 8,954   8,494   5  
Capital ratios – BIS under Basel II            
  Tier 1 13.0 %(4) 10.7 %(5)    
  Total 16.4 %(4) 14.3 %(5)    
Capital ratios – BIS under Basel I            
  Tier 1 11.9 % 11.5 %    
  Total 15.5 % 15.2 %    
Impaired loans net of specific and general allowances (276 ) (233 )    
  As a % of loans and acceptances (0.4 )% (0.4 )%    
Assets under administration/management 221,707   192,551      
Total personal savings 112,868   106,458      
Interest coverage 8.97   8.04      
Asset coverage 4.27   4.19      
Other information            
Number of employees 18,438   17,747   4  
Number of branches in Canada 442   445   (1 )
Number of banking machines 875   855   2  
   
(1) Adjusted for gains or losses mainly attributable to third parties.
(2) See "Financial Reporting Method" on page 5.
(3) Net of securitized assets.
(4) Calculated using the AIRB Approach.
(5) Calculated using the Standardized Approach.

FINANCIAL REPORTING METHOD

The Bank uses certain measurements that are not in accordance with generally accepted accounting principles (GAAP) to assess results. Securities regulators require companies to caution readers that net income and other measurements adjusted using non-GAAP criteria are not standard under GAAP and cannot be easily compared with similar measurements used by other companies.

Financial Information                          
(unaudited) (millions of dollars)                          
  Notes Quarter ended       Nine months ended      
    July 31, 2010   July 31, 2009   % Change   July 31, 2010   July 31, 2009   % Change  
                           
Personal and Commercial   162   123   32   442   374   18  
Wealth Management   28   26   8   79   87   (9 )
Financial Markets   98   170   (42 ) 367   366    
Other   (17 ) (16 )     (141 ) (214 )    
Net income   271   303   (11 ) 747   613   22  
Plus: Charges related to holding MAV notes 1 2   1       5   119      
Plus: Administrative penalty 2         75        
Plus: Charge related to commitments to extend credit 3           86      
Less: Reversal of a provision for income tax contingencies 4         (25 )      
Net income excluding specified items   273   304   (10 ) 802   818   (2 )
                           
                           
Diluted earnings per common share   $ 1.56   $ 1.78   (12 ) $ 4.28   $ 3.55   21  
Plus: Charges related to holding MAV notes 1 0.01   0.01       0.03   0.74      
Plus: Administrative penalty 2         0.46        
Plus: Charge related to commitments to extend credit 3           0.54      
Less: Reversal of a provision for income tax contingencies 4         (0.15 )      
Diluted earnings per common share excluding specified items   $ 1.57   $ 1.79   (12 ) $ 4.62   $ 4.83   (4 )
                           
Return on common shareholders' equity                          
  Including specified items   17.7 % 22.1 %     16.6 % 15.2 %    
  Excluding specified items   17.7 % 21.3 %     17.8 % 20.0 %    
   
(1) Master asset vehicle (MAV) notes replaced asset-backed commercial paper (ABCP) under the restructuring plan for these instruments. During the quarter ended July 31, 2010, the financing cost of holding MAV notes was $2 million, net of income taxes. During the quarter ended July 31, 2009, the $1 million in charges, net of income taxes, related to holding MAV notes included a loss on economic hedge transactions, financing costs, and a recovery of MAV-related professional fees. During the nine months ended July 31, 2010, the following items, net of income taxes, were recognized in relation to the holding of MAV notes: a $1 million gain on economic hedge transactions (2009: $19 million loss) and $6 million in MAV-note financing costs (2009: $9 million). During the nine months ended July 31, 2009, the Bank had also recognized the following items, net of income taxes, in relation to the holding of MAV notes: a $129 million loss on available-for- sale securities, $41 million in interest received or receivable, and $3 million in professional fees.
(2) During the nine months ended July 31, 2010, a $75 million administrative penalty was recognized as part of a settlement of an ABCP industry-wide agreement.
(3) During the nine months ended July 31, 2009, an $86 million provision, net of income taxes, for credit losses related to commitments to extend credit to clients holding MAV notes had been recorded.
(4) During the nine months ended July 31, 2010, an income tax provision of $25 million was reversed as a result of a revaluation of future income tax liabilities.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

From time to time, National Bank of Canada (the Bank) makes written and oral forward-looking statements, such as those contained in the "Major Economic Trends and Outlook" section and under the "Medium-term objectives" heading in the "Overview" section of the 2009 Annual Report, in other filings with Canadian securities regulators and in other communications, for the purpose of describing the economic environment in which the Bank will operate during fiscal 2010 and the objectives it has set for itself for that period. These forward-looking statements are made pursuant to the "safe harbour" provisions of Canadian and U.S. securities legislation. They include, among others, statements with respect to the economy— particularly the Canadian and U.S. economies—market changes, observations regarding the Bank's objectives and its strategies for achieving them, Bank projected financial returns and certain risks faced by the Bank. These forward-looking statements are typically identified by future or conditional verbs or words such as "outlook," "believe," "anticipate," "estimate," "project," "expect," "intend," "plan," and terms and expressions of similar import.

By their very nature, such forward-looking statements require assumptions to be made and involve inherent risks and uncertainties, both general and specific. Assumptions about the performance of the Canadian and U.S. economies in 2010 and how that will affect the Bank's business are among the main factors considered in setting the Bank's strategic priorities and objectives and in determining its financial targets, including provisions for credit losses. In determining its expectations for economic growth, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies. Tax laws in the countries in which the Bank operates, primarily Canada and the United States, are major factors it considers when establishing its effective tax rate. There is a strong possibility that express or implied projections contained in such statements will not materialize or will not be accurate. The Bank recommends that readers not place undue reliance on these statements, as a number of factors, many of which are beyond the Bank's control, 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.
These factors include the management of credit, market and liquidity risks; the strength of the Canadian and U.S. economies and the economies of other countries in which the Bank conducts business; the impact of the movement of the Canadian dollar relative to other currencies, particularly the U.S. dollar; the effects of changes in monetary policy, including changes in interest rate policies of the Bank of Canada and the U.S. Federal Reserve; the effects of competition in the markets in which the Bank operates; the impact of changes in the laws and regulations regulating financial services and enforcement thereof (including banking, insurance and securities); judicial proceedings, regulatory proceedings or claims, class actions or other recourses of various nature; the situation with respect to master asset vehicles, in particular the realizable value of underlying assets; the Bank's ability to obtain accurate and complete information from or on behalf of its clients or counterparties; the Bank's ability to successfully realign its organization, resources and processes; its ability to complete strategic acquisitions and integrate them successfully; changes in the accounting policies and methods the Bank uses to report its financial condition, including uncertainties associated with critical accounting assumptions and estimates; the Bank's ability to recruit and retain key officers; operational risks, including risks related to the Bank's reliance on third parties to ensure access to the infrastructure essential to the Bank's business as well as other factors that may affect future results, including changes in trade policies; timely development of new products and services; changes in estimates relating to reserves; changes in tax laws; technological changes; unexpected changes in consumer spending and saving habits; natural disasters; the possible impact on the business from public health emergencies, conflicts, other international events and developments, including those relating to the war on terrorism; and the Bank's success in anticipating and managing the foregoing risks. A substantial amount of the Bank's business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank's financial results, businesses, financial condition, or liquidity.

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found under "Risk Management" and "Factors That Could Affect Future Results" in the 2009 Annual Report. 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 also cautions readers not to place undue reliance on these forward-looking statements. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.

The forward-looking information contained in this document is presented for the purpose of interpreting the information contained herein and may not be appropriate for other purposes.

Disclosure of Third Quarter 2010 Results

Conference Call

  • A conference call for analysts and institutional investors will be held on August 26, 2010 at 1:30 p.m. EDT.
  • Access by telephone in listen-only mode: 1-866-223-7781 or 416-340-8018.
  • A recording of the conference call can be heard until September 2, 2010 by calling 1-800-408-3053 or 416-695-5800. The access code is 7824042#.

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.

Contact Information

  • National Bank Financial Group
    Patricia Curadeau-Grou
    Chief Financial Officer and Executive Vice-President
    Finance, Risk and Treasury
    514-394-6619
    or
    National Bank Financial Group
    Jean Dagenais
    Senior Vice-President
    Finance, Taxation and Investor Relations
    514-394-6233
    or
    National Bank Financial Group
    Claude Breton
    Senior Manager
    Public Relations
    514-394-8644
    or
    National Bank Financial Group
    Helene Baril
    Senior Director
    Investor Relations
    514-394-0296