NATIONAL BANK OF CANADA
TSX : NA

NATIONAL BANK OF CANADA

February 28, 2008 08:11 ET

National Bank Releases its First Quarter 2008 Results

- Net income up 6% to a record $255 million - Diluted earnings per share up 10% to $1.58 - Return on equity of 22.9% Financial highlights excluding specified items for the quarter(1): - Net income of $237 million - Diluted earnings per share of $1.46 - Return on equity of 21.3% (1) The financial reporting method is explained in detail

MONTREAL, QUEBEC--(Marketwire - Feb. 28, 2008) - National Bank (TSX:NA) today announced record net income of $255 million for the first quarter of 2008, up 6% from the corresponding quarter of 2007. Excluding specified items, namely, the gain related to the sale of the Bank's operations in Nassau, Bahamas, as well as the financing costs and professional fees related to asset-backed commercial paper (ABCP), net income was $237 million, compared to $240 million for the year-earlier period. Diluted earnings per share were $1.58, up 10% compared to $1.43 in the first quarter of 2007. Excluding specified items, diluted earnings per share were $1.46, an increase of $0.03.

"These are very good results considering the strong volatility currently being experienced on various global financial markets. We are continuing to lay the groundwork of the Bank's renewed development strategy with a view to accelerating our rate of growth in order to achieve our financial objectives," said Louis Vachon, President and Chief Executive Officer.

Highlights

- Growth of 9% in consumer loans, attributable to the ever growing volume of personal mortgage lines of credit in branches and loans under partnership agreements.

- Excellent quality of the loan portfolio maintained, reflected mainly in the minimal increase in the provision for credit losses at Personal and Commercial, which totalled $44 million this quarter, barely $1 million more than in the first quarter of 2007.

- Net gain of $32 million following the sale of the Bank's subsidiary in Nassau, Bahamas.

- Issuance of $400 million of innovative Tier 1 capital.

Personal and Commercial

- Net income of $130 million in the first quarter of 2008, for an increase of 6%, owing to higher revenues coupled with lower operating expenses.

- Robust growth of 9% in consumer loans. Business growth was mitigated by a narrowing of the net interest margin from 2.88% in the first quarter of 2007 to 2.66% in the first quarter of 2008.

- Increase of $1.3 billion in personal deposits since October 31, 2007 to $31.5 billion.

- Increase of 15% in the volume of deposits from medium-sized businesses since the first quarter of 2007, with the largest proportion of this growth coming from outside Quebec.

Wealth Management

- Total revenues of $216 million in the quarter, as against $223 million in the first quarter of 2007, a variation attributable to weaker financial markets that primarily affected the securities brokerage subsidiaries.

- In February 2008, acquisition of the securities brokerage firm Groupe Financier Everest and the investment management firm Aquilon Capital Corp., whose assets under management totalled $1.1 billion.

Financial Markets

- Total revenues of $284 million, including non-controlling interest, a level almost equal to one year earlier.

- Net income of $73 million in the quarter, versus $83 million in the year-earlier period.



2008 FINANCIAL OBJECTIVES

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Results excluding
First quarter 2008 Objectives Results specified items

Growth in diluted
earnings per share 3% - 8% 10% 2%
Return on common
shareholders' equity 16% - 21% 22.9% 21.3%
Tier 1 capital ratio More than 8.0% 9.3% 9.3%
Dividend payout ratio 40% - 50% 41.3%
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Financial Reporting Method

The Bank uses certain measurements that do not comply with generally accepted accounting principles (GAAP) to assess results. Securities regulators require companies to caution readers that net earnings and any 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
Quarter ended January 31
(unaudited)
(millions of dollars)

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2008 2007 %
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Personal and Commercial 130 123 6
Wealth Management 41 44 (7)
Financial Markets 73 83 (12)
Other 11 (10) -
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Net income 255 240 6
Less: Gain on the sale of the Bank's
subsidiary in Nassau (32) -
Plus: ABCP financing cost(1) and professional fees 14 -
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Net income excluding specified items 237 240 (1)
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Earnings per share - diluted $1.58 $1.43 10
Less: Gain on the sale of the Bank's
subsidiary in Nassau (0.20) -
Plus: ABCP financing cost(1) and professional fees 0.08 -
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Diluted earnings per share excluding
specified items $1.46 $1.43 2
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Return on common shareholders' equity
Including specified items 22.9% 20.7%
Excluding specified items 21.3% 20.7%
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(1) No accrued interest receivable was recorded on the ABCP


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 Challenges" section and under "2008 Objectives" in the "Overview" section of the Annual Report and in the "2008 Financial Objectives" section of this Report to Shareholders for the purpose of describing the economic environment in which the Bank will operate during fiscal 2008 and the objectives it has set for itself for that period. Such statements are made pursuant to Canadian securities regulations and the 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 (in particular, the Canadian and U.S. economies), market changes, the achievement of strategic priorities and objectives, future strategies and actions, the price of Bank shares, certain risks as well as statements with respect to our beliefs, plans, expectations, 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. Assumptions about the performance of the Canadian and U.S. economies in 2008 and how that will affect the Bank's business are material factors considered in setting the Bank's strategic priorities and objectives, and in determining its financial targets, including provisions for credit losses. Key assumptions include that economic growth in Canada and the United States will be modest in 2008 and that inflation will remain low in North America. The Bank has also assumed that interest rates in Canada and the United States will decline slightly in 2008 and that the Canadian dollar will likely trade at parity with the U.S. dollar at the end of the year. In determining its expectation for economic growth, both broadly and in the financial services sector, 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 material factors it considers when establishing its sustainable effective tax rate. 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, the management of credit, market and liquidity risks; the strength of the Canadian and United States 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; 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 judgments and legal proceedings; developments with respect to the restructuring proposal relating to asset-backed commercial paper (ABCP) and liquidity in the ABCP market; 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; operational and infrastructure risks; 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 other developments, including those relating to the war on terrorism; and the Bank's success in anticipating and managing the foregoing risks.

Additional information about these factors can be found under "Risk Management" and "Factors That Could Affect Future Results" in the 2007 Annual Report.

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 also cautions readers not to place undue reliance on these forward-looking statements. Moreover, these forward-looking statements may not be suitable for establishing strategic priorities and objectives, future strategies or actions, financial objectives and projections other than those mentioned above.



HIGHLIGHTS
(unaudited)
(millions of dollars)

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Quarter ended January 31, January 31, % Change
2008 2007
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Operating results
Total revenues $929 $989 (6)
Total revenues adjusted for
non-controlling interest(2) 991 988 -
Net income 255 240 6
Return on common shareholders' equity 22.9% 20.7%

Per common share (dollars)
Earnings - basic $1.58 $1.45 9
Earnings - diluted 1.58 1.43 10
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EXCLUDING SPECIFIED ITEMS(1)
Operating results
Total revenues $916 $989 (7)
Total revenues adjusted for
non-controlling interest(2) 978 988 (1)
Net income 237 240 (1)
Return on common shareholders' equity 21.3% 20.7%

Per common share (dollars)
Earnings - basic $1.47 $1.45 1
Earnings - diluted 1.46 1.43 2
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Per common share (dollars)
Dividends declared $0.62 $0.54 15
Book value 28.13 28.34 (1)
Stock trading range
High 54.25 66.59
Low 45.15 61.36
Close 50.53 64.29
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January 31, October 31, % Change
2008 2007
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Financial position
Total assets $120,124 $113,085 6
Loans and acceptances 52,095 52,045 -
Deposits 73,122 70,798 3
Subordinated debentures and
shareholders' equity 6,505 6,242 4
Capital ratios - BIS under Basel II
Tier 1 9.3%
Total 12.9%
Capital ratios - BIS under Basel I
Tier 1 9.8% 9.0%
Total 13.5% 12.4%
Impaired loans, net of specific and
general allowances (168) (179)
as a % of loans and acceptances (0.3)% (0.3)%
Assets under
administration/management 233,835 239,028
Total personal savings 104,024 106,288
Interest coverage 7.83 7.88
Asset coverage 4.36 3.89
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Other information
Number of employees 16,856 16,863 -
Number of branches in Canada 446 447 -
Number of banking machines 846 835 1
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(1) See "Financial Reporting Method"
(2) Adjusted for gains or losses attributable to third parties using the
Innocap platform.


Management's Discussion and Analysis of Financial Condition and Operating Results

February 27, 2008 - 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 National 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 2008. 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 reported record net income of $255 million in the first quarter of fiscal 2008, as against net income of $240 million in the corresponding quarter of 2007. Excluding specified items, namely, the gain related to the sale of the Bank's Nassau operations, as well as the financing cost and professional fees related to the ABCP held, net income in the first quarter of 2008 was $237 million, down $3 million from the first quarter of 2007. Diluted earnings per share rose 10% to $1.58 from $1.43 in the same period a year earlier. Excluding specified items, diluted earnings per share were $1.46, up $0.03 from the first quarter of 2007.

Return on common shareholders' equity in the first quarter of 2008 was 22.9%, compared to 20.7% for the corresponding period of 2007. Excluding the specified items of 2008, ROE was 21.3%, up 60 basis points versus the year-earlier period.

Total Revenues

The Bank's total revenues amounted to $929 million in the first quarter of 2008, compared to $989 million in the corresponding period of 2007. Taking into account non-controlling interest, total revenues reached $991 million in the first quarter of 2008, for a year-over-year increase of $3 million.

Net interest income for the quarter was $428 million versus $276 million in the first quarter of 2007. Net interest income at Personal and Commercial declined $2 million to $342 million for the quarter. This decrease was attributable to the net interest margin, which narrowed from 2.88% in the first quarter of 2007 to 2.66% in the first quarter of 2008. This narrowing stemmed from the reduction in the net interest margin on credit products due to higher financing costs, primarily because of tighter credit conditions around the world. Moreover, trading revenues recorded to net interest income increased $155 million and the cost of financing the ABCP held by the Bank reduced net interest income for the quarter by $19 million.

Other income for the first quarter totalled $501 million, as against $713 million for the same period of 2007. Trading losses recorded to other income reached $68 million in the first quarter of 2008, compared to trading revenues of $131 million a year earlier. These losses were more than offset by net interest income and non-controlling interest related to trading activities. Securities brokerage commissions declined $10 million to $59 million. Revenues from mutual funds and trust services fell $6 million from the first quarter of 2007 to $79 million this quarter. These decreases were essentially due to the weakness of financial markets. Underwriting commissions and advisory service fees totalled $95 million in the first quarter of 2008, as against $98 million a year earlier, and securitization revenues amounted to $46 million, compared to $48 million in the same period of 2007. Insurance revenues were up $4 million to $34 million. Other income was up $4 million to $89 million owing to the $32 million gain on sale of the Bank's subsidiary in Nassau, offset by lower merchant banking activities.

Operating Expenses

In the first quarter of 2008, operating expenses declined $24 million from the first quarter of 2007 to $632 million this quarter. The reduced cost of variable compensation at the Bank's full-service brokerage accounted for the decrease. In addition, technology expenses remained stable, while other expenses were down $8 million.

Provision for credit losses

For the first quarter of 2008, the Bank recorded specific provisions for credit losses of $32 million, or $3 million more than in the corresponding period of 2007. As at January 31, 2008, gross impaired loans stood at $249 million, or $10 million more than at the same date a year earlier. This increase, attributable to credit to medium-sized businesses and consumer loans, was mitigated by the decrease in gross impaired loans to corporations. As at January 31, 2008, the provision for credit losses exceeded gross impaired loans by $168 million, as against $196 million as at January 31, 2007.

Income Taxes

Income taxes for the first quarter of 2008 were $67 million, representing an effective tax rate of 25%. This is comparable to income taxes of $56 million for the same quarter a year earlier and an effective tax rate of 18%. Excluding the gain on the sale of operations in Nassau and the non-controlling interest in revenues, the tax rate was 23% for the first quarter of 2008.

Results by Segment

Personal and Commercial

Personal and Commercial net income totalled $130 million in the first quarter of 2008, up $7 million from the $123 million in net income earned in the corresponding quarter of 2007. Total revenues for the segment rose $6 million to $546 million. Loan and deposit volumes at Personal and Commercial experienced robust growth of 8% and 5%, respectively, in the first quarter of 2008 versus the year-earlier period. This growth was tempered by the narrowing of the net interest margin by 22 basis points in the first quarter of 2008 compared to the first quarter of 2007, reflecting tighter credit conditions on markets, which increased the cost of funds.

Total revenues at Personal Banking advanced $6 million in the first quarter of 2008 as against the year-earlier period. This increase, which stemmed from the $3.2 billion or 9% growth in the volume of average assets, was mitigated by the narrower net interest margin on credit products, while the margin on deposit products remained essentially unchanged.

Total revenues at Commercial Banking remained stable in the first quarter of 2008. Growth in business loan and deposit volumes was offset by the narrowing net interest margin on credit products. The margin on deposits, however, widened slightly.

Operating expenses at Personal and Commercial were $309 million in the first quarter of 2008, a decrease of $3 million from the corresponding quarter of 2007. This decrease was attributable to ongoing efforts to improve productivity, which focused on reducing operations - support expenses. At 57%, the efficiency ratio for the first quarter of 2008 improved 1% from the 58% posted for the year-earlier period. The segment's provision for credit losses was slightly up by $1 million or 2% to reach $44 million, due to higher credit losses for Commercial Banking.

Wealth Management

Wealth Management net income amounted to $41 million in the first quarter of 2008, compared to $44 million in the same quarter of 2007, for a decrease of $3 million. Total revenues for the segment were $216 million for the quarter, as against $223 million for the year-earlier period. Robust private investment management, mutual fund and portfolio management operations were offset by a decline in securities brokerage activities attributable to more difficult market conditions during the quarter. The efficiency ratio for the first quarter of 2008 was 71%, compared to 70% for the same quarter of 2007. This change was mainly due to lower variable compensation.

Financial Markets

The Financial Markets segment recorded net income of $73 million in the first quarter of 2008, down $10 million versus the same period in 2007. Total revenues for the segment amounted to $222 million, as against $293 million for the first quarter of 2007. Including non-controlling interest, total revenues for the quarter were $284 million, only 3% less than the year-earlier period. Trading revenues for the quarter totalled $124 million, up $16 million from the corresponding quarter of 2007. Financial market fees rose $6 million to $72 million, while the change in gains on available for sale securities and the change in banking service revenues offset each other. The decrease in other revenues was attributable to lower merchant banking activities.

Operating expenses for the first quarter of 2008 were $173 million, up $5 million from the same period in 2007. This rise stemmed from higher technology expenses, professional fees and other expenses, while the increase in variable compensation was due to the revenue mix for this quarter. The efficiency ratio was 61%, as against 58% in the first quarter of 2007. The provision for credit losses was nil for this segment for both the first quarter of 2007 and the first quarter of 2008.



FINANCIAL MARKET REVENUES
(taxable equivalent basis(1))
(millions of dollars)

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Q1 Q1
2008 2007
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Trading revenues(2)
Equity (13) 87
Fixed income 95 5
Commodity and foreign exchange 42 16
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124 108
Financial market fees 72 66
Gains on available for sale securities 23 29
Banking services 49 44
Other 16 45
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Total 284 292
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(1) See Note 17 to the Consolidated Financial Statements
(2) Adjusted for non-controlling interest


Other

The Other heading of segment results posted net income of $11 million in the first quarter of 2008, compared to a net loss of $10 million in the corresponding quarter of 2007. The segment recognized a gain of $32 million on the sale of the Bank's subsidiary in Nassau, Bahamas. A net loss of $14 million, after income tax recovery, was recorded for the cost of financing ABCP held. Securitization revenues declined $2 million to $46 million in the quarter.

Comprehensive Income

In the first quarter of 2008, comprehensive income was $303 million, which was $48 million higher than net income. The difference comes primarily from unrealized gains on derivative financial instruments designated as cash flow hedges.

Cash Flows

Due to the nature of the Bank's business, most of its revenues and expenses are cash items. Moreover, certain activities, such as trading activities, generate significant cash flow movement, which can have an impact on several assets and liabilities such as held for trading securities, securities sold short or securities sold under repurchase agreements.

During the first quarter of 2008, cash and cash equivalents increased by $1.2 billion, while they remained unchanged in the first quarter of 2007. As at January 31, 2008, cash and cash equivalents totalled $4.2 billion versus $10.8 billion one year earlier.

Operating activities required $4.6 billion in cash flows, owing chiefly to the $5.6 billion increase in held for trading securities. For the first quarter of 2007, operating activities required cash flows of $2.0 billion, due to the $2.3 billion increase in held for trading securities.

Financing activities generated cash flows of $6.3 billion, due to the increase of $2.1 billion in securities sold short, $1.1 billion in securities sold under repurchase agreements and $2.3 billion in deposits. For the corresponding period of 2007, financing activities generated $4.3 billion in cash flows, mainly as a result of the $2.2 billion increase in securities sold short and the $2.3 billion increase in securities sold under repurchase agreements.

Lastly, investing activities required $0.5 billion in cash flows in the first quarter of 2008, owing to the $2.9 billion increase in securities purchased under reverse repurchase agreements, offset by the $1.9 billion decrease in available for sale securities. For the corresponding period of 2007, investing activities required cash flows of $2.4 billion, mainly due to the increase in securities purchased under reverse repurchase agreements.

Balance Sheet

As at January 31, 2008, the Bank had assets of $120.1 billion, compared to $113.1 billion as at October 31, 2007. Loans and acceptances were stable, as the decrease in retail mortgage volumes was offset by growth in other consumer credit, including credit card receivables. Cash, deposits with financial institutions, securities and securities purchased under reverse repurchase agreements rose $7.7 billion. The table below presents the main portfolios.



AVERAGE MONTHLY VOLUMES
(millions of dollars)

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January October January
2008 2007 2007
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Loans and acceptances(i)
Residential mortgages 22,977 22,858 21,689
Consumer loans 11,314 11,050 9,738
Credit card receivables 1,835 1,793 1,775
SME loans 14,195 14,048 13,599
Corporate loans 6,285 5,919 5,378
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56,606 55,668 52,179
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Deposits
Personal (balance) 31,522 30,215 29,628
Off-balance sheet personal
savings (balance) 72,502 76,073 71,570
Business 12,134 11,870 11,029
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(i) including securitized assets


Residential mortgage loans rose 6% as at January 31, 2008, reaching $23.0 billion compared to $21.7 billion as at January 31, 2007. Consumer loans climbed 16.2% to $11.3 billion, primarily driven by higher volumes of secured lines of credit. SME loans increased $0.6 billion to $14.2 billion and corporate loans continued to grow, rising 16.9% to $6.3 billion.

Personal deposits stood at $31.5 billion as at January 31, 2008, up $1.9 billion from the same period a year earlier, with most of that growth derived from term deposits. Off-balance sheet personal savings administered by the Bank as at January 31, 2008 totalled $72.5 billion up $0.9 billion in a year. The increase was primarily attributable to savings administered by private investment management. Business deposits advanced $1.1 billion year over year to $12.1 billion as at January 31, 2008.

Asset-Backed Commercial Paper

On December 23, 2007, the Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper approved an agreement in principle to restructure 43 series of asset-backed commercial paper (ABCP) issued by 20 trusts. The restructuring plan will extend the maturity of the ABCP to provide for a maturity similar to that of the underlying assets. Trusts with ABCP supported in whole or in part by synthetic assets will pool their assets. Floating rate notes will be issued in exchange for their existing ABCP, with maturities based upon the maturities of the underlying pooled assets which are expected to be an average of seven years. Trusts with ABCP supported solely by traditional securitized assets will be restructured on a series-by-series basis, with each trust or series maintaining its separate assets. Noteholders will receive floating rate notes with maturities based upon the maturity of the underlying assets which will amortize and be repaid as assets mature or are sold. Trusts with ABCP supported by "ineligible" assets for which the credit quality is uncertain, principally as a result of exposure to sub-prime or home equity loan mortgages in the United States, will be restructured on a series-by-series basis, with each series maintaining its separate exposure to its own assets. Noteholders will receive floating rate notes with maturities based upon the maturity of the underlying assets which will amortize and be repaid as assets mature or are sold.

Taking into account this additional information and the higher probability of a successful restructuring of the ABCP, the Bank adjusted its valuation approach in order to assess the fair value of the ABCP it was holding as at January 31, 2008. For most of the ABCP held, the Bank considered the very high quality of the underlying assets and determined the fair value using a discounted cash flow analysis. The main assumptions pertain to the expected coupons, the expected maturity of the floating rate notes received in exchange of the ABCP, the expected rating and an appropriate discount rate taking into account risks of future losses. The expected discount rate is determined based on observable market inputs for comparable securities.

For ABCP that is not restructured or not under the Pan-Canadian Investors Committee process, as well as for ABCP supported by ineligible assets, observable market inputs for comparable securities from independent pricing sources were used to assess the fair value of each class of assets in the trusts.

To determine the value of the ABCP it holds, the Bank established a range of estimated fair value. Since the carrying value of the ABCP held by the Bank as of October 31, 2007 is within the range of the estimated fair value established as of January 31, 2008, no change was made to the carrying value as of January 31, 2008. The carrying value of the ABCP held by the Bank, as of January 31, 2008, was $1,707 million of which $1,580 million was classified in Available for sale securities and $127 million was classified in Held for trading securities.

The Bank's valuation was based on its assessment of the conditions prevailing as at January 31, 2008, which may change in subsequent periods. Determining the fair value of ABCP is complex and involves an extensive process that includes the use of quantitative modeling and relevant assumptions. Possible changes that could have a material effect on the future value of the ABCP include (1) changes in the value of the underlying assets, (2) developments related to the liquidity of the ABCP market, (3) the outcome of the restructuring of the conduits and (4) a slowdown in economic conditions in North America.

Risk Management

The Bank views risk as an integral part of its development and the diversification of its activities. Information on risk management is included in Tables 1 to 6 presented in the Additional Financial Information section at the end of this Management's Discussion and Analysis and in Note 3 to the unaudited interim consolidated financial statements regarding management of the risks associated with financial instruments.

Accounting Policies and Estimates

The unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP). The reader is referred to Note 1 to the 2007 audited annual consolidated financial statements for more information on the significant accounting policies used to prepare the consolidated financial statements. Certain of these accounting policies 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. The key assumptions and bases for estimates made by Management in accordance with GAAP are described in the 2007 Annual Report.

There have not been any changes to the Bank's significant accounting policies affecting fiscal 2008, other than the one described in Note 2a) to the unaudited interim consolidated financial statements on accounting changes.

Furthermore, the Bank adopted the new standards set out in the CICA Handbook relating to disclosure for financial instruments and capital as well as the standards relating to the presentation of financial instruments. The reader is referred to Note 2a) to the unaudited interim consolidated financial statements.

Details of a future change in accounting standards are presented in Note 2b) to the unaudited interim consolidated financial statements.

Disclosure on Internal Controls over Financial Reporting

During the first quarter of 2008, no changes were made to the Bank's internal control over financial reporting policies, procedures and other processes that have materially affected, or are reasonably likely to materially affect, the Bank's internal control over financial reporting.

Capital

Tier 1 and total capital ratios, according to the new rules of the Bank for International Settlements (BIS) - Basel II - stood at 9.3% and 12.9%, respectively, as at January 31, 2008. If these ratios had been calculated using the old BIS rules - Basel I - they would have been 9.8% and 13.5%, respectively, as at January 31, 2008, compared to 9.0% and 12.4% as at October 31, 2007.

The increase in the capital ratios was essentially attributable to the issue of $400 million in NBC CapS II - Series 1 securities. Furthermore, as at January 31, 2008, risk-weighted assets under Basel I would have been $49.3 billion, compared to $51.6 billion under the new rules, an increase of 4.7% from October 31, 2007. This increase mitigated the rise in the ratios and was primarily due to the impact of including operational risk in the calculation of risk-weighted assets.

Other information on capital is provided in Table 7 presented in the Additional Financial Information section at the end of this Management's Discussion and Analysis as well as in Note 4 to the unaudited interim consolidated financial statements on capital disclosure.

Subsequent Events

In February 2008, a Bank's subsidiary acquired Groupe Financial Everest, a securities brokerage firm and Aquilon Capital Corp., an investment management firm. The combined assets under management totalled $1.1 billion.

Dividends

The Board of Directors declared regular dividends on the various classes and series of preferred shares and a dividend of $0.62 per common share, payable on May 1, 2008 to shareholders of record on March 27, 2008.



Additional financial information

Quarterly information
(unaudited)
(millions of dollars except per share amounts)

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2008 2007
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Q1 Q4 Q3 Q2 Q1
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Total revenues $929 $402 $1,010 $1,022 $989
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Net income (loss) 255 (175) 243 233 240
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Earnings (loss) per
common share
Basic 1.58 (1.14) 1.49 1.42 1.45
Diluted 1.58 (1.14) 1.48 1.40 1.43
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Dividends
per common share 0.62 0.60 0.60 0.54 0.54
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Return on common
shareholders' equity 22.9% (16.0)% 20.6% 20.3% 20.7%
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Total assets $120,124 $113,085 $123,353 $135,172 $121,402
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Impaired loans,net 140 129 110 110 112
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Per common share
Book value 28.13 26.85 28.70 28.92 28.34
Stock trading range
High 54.25 60.28 66.14 65.87 66.59
Low 45.15 50.50 60.61 61.96 61.36
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2006 2007 2006
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Q4 Q3 Q2 Total Total
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Total revenues $970 $921 $941 $3,423 $3,803
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Net income (loss) 220 220 214 541 871
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Earnings (loss) per
common share
Basic 1.33 1.32 1.29 3.25 5.22
Diluted 1.31 1.30 1.26 3.22 5.13
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Dividends
per common share 0.50 0.50 0.48 2.28 1.96
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Return on common
shareholders' equity 19.7% 20.2% 20.4% 11.5% 20.1%
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Total assets $116,801 $108,552 $111,083
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Impaired loans,net 116 98 111
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Per common share
Book value 27.17 26.57 25.77
Stock trading range
High 62.86 62.69 65.60
Low 58.26 56.14 61.35
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Table 1 - Distribution of loans by borrower category

As at January 31, 2008
(unaudited)
(millions of dollars)

---------------------------------------------------------------------------
Gross Impaired Specific Provision for
loans loans allowances credit losses Write-offs
---------------------------------------------------------------------------
Personal(1) 13,784 35 12 16 30
---------------------------------------------------------------------------

Residential
mortgage 15,044 26 2 - -
---------------------------------------------------------------------------

Non-residential
mortgage 1,379
Agricultural 1,980
Financial
institutions 3,844
Manufacturing 2,064
Construction and
real estate 1,161
Transportation and
communications 494
Mines, quarries
and energy 1,233
Forestry 151
Government 1,278
Wholesale 546
Retail 1,209
Services 951
Other 2,861
---------------------------------------------------------------------------
Total - Business
and government 19,151 188 95 16 29
---------------------------------------------------------------------------

Total 47,979 249 109 32 59
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) Including consumer loans, credit cards and other personal loans



Table 2 - Geographic distribution of loans

As at January 31, 2008
(unaudited)
(millions of dollars)

-----------------------------------------------------------------------
Gross Impaired Specific
loans loans allowances
-----------------------------------------------------------------------

Canada
Residential mortgage 14,989 26 1
Personal and credit card 13,547 35 12
Business and government 16,444 171 94
-----------------------------------------------------------------------
44,980 232 107
-----------------------------------------------------------------------
United States
Residential mortgage 55 - 1
Personal and credit card 2 - -
Business and government 2,693 17 1
-----------------------------------------------------------------------
2,750 17 2
-----------------------------------------------------------------------
Others
Residential mortgage - - -
Personal and credit card 235 - -
Business and government 14 - -
-----------------------------------------------------------------------
249 - -
-----------------------------------------------------------------------
47,979 249 109
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Table 3 - Credit risk mitigation

As at January 31, 2008
(unaudited)
(millions of dollars)

Total exposure covered by
------------------------------------------------------------------------
Eligible
financial Credit
collateral Guarantees derivatives
------------------------------------------------------------------------

Balance sheet exposures
Securities purchased under reverse
repurchase agreements and
securities sold under
repurchase agreements 10,772 - -
Loans
Residential mortgage - 8,804 -
Personal and credit card - 907 -
Business and government 1,197 1,377 66
Derivative financial instruments 416 - -
------------------------------------------------------------------------
------------------------------------------------------------------------



Table 4 - Breakdown of credit risk by derivative financial instrument
portfolio

As at January 31, 2008
(unaudited)
(millions of dollars)


------------------------------------------------------------------------
Risk-
Replacement Credit weighted
cost equivalent amount
------------------------------------------------------------------------

Interest rate
contracts 1,106 1,790 425
Foreign exchange
contracts 1,126 2,201 778
Equity contracts 1,170 3,399 1,855
Commodity
contracts 248 253 192
Credit derivative
contracts 329 1,449 290
------------------------------------------------------------------------
3,979 9,092 3,540
Impact of master
netting agreements (1,979) (4,168) (1,262)
------------------------------------------------------------------------
2,000 4,924 2,278
Impact of
collateral held (421) (381) (119)
------------------------------------------------------------------------
1,579 4,543 2,159
------------------------------------------------------------------------
------------------------------------------------------------------------

Excluding, in accordance with the guidelines of the Superintendant of
Financial Institutions Canada, exchange-traded instruments and forward
contracts with an original maturity of 14 days. The total positive fair
value of these contracts amounted to $254 millions as at January 31, 2008.



Table 5 - Credit derivative position (notional amounts)

As at January 31, 2008
(unaudited)
(millions of dollars)

--------------------------------------------------------------------------
Loan portfolio Trading
--------------------------------------------------------------------------
Protection Protection Protection Protection
purchased sold purchased sold
--------------------------------------------------------------------------

Credit default swaps 66 - 7,164 6,028
--------------------------------------------------------------------------
------------------------------------------------------------------------


Table 6 - Daily trading revenues

A graphic of the Daily Trading Revenues is available at the following
adddress: http://media3.marketwire.com/docs/DailyTradingRevenues.pdf

Table 7 - Capital adequacy

As at January 31, 2008
(unaudited)
(millions of dollars)

Basel II Basel I
-----------------------------------------------------------------------
Risk-weighted Risk-weighted
exposures exposures
-----------------------------------------------------------------------

Capital requirements for credit risk
Retail residential mortgages 3,450 4,727
Other retail 6,668 8,891
Corporate 24,771 26,218
Sovereign 6 6
Bank 1,807 1,639
Trading book 1,903 1,218
-----------------------------------------------------------------------
Total capital requirements for
credit risk 38,605 42,699
-----------------------------------------------------------------------

Capital requirements for securities
available for sale - Equities 1,355 1,355
-----------------------------------------------------------------------

Capital requirements for market risk
Standardized approach 3,351 2,845
Advanced measurement approach 876 876
-----------------------------------------------------------------------
Total capital requirements for market risk 4,227 3,721
-----------------------------------------------------------------------

Capital requirements for
operational risk 5,913 -
-----------------------------------------------------------------------

Capital requirements for other assets 1,499 1,499
-----------------------------------------------------------------------

Total capital requirements 51,599 49,274
-----------------------------------------------------------------------
-----------------------------------------------------------------------

Tier 1 capital ratio 9.3% 9.8%
Total capital ratio 12.9% 13.5%
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Consolidated Financial Statements
Consolidated Balance Sheet
(unaudited)
(millions of dollars)

-----------------------------------------------------------------------
January 31, October 31, January 31,
2008 2007 2007
-----------------------------------------------------------------------

ASSETS
Cash 262 283 262
-----------------------------------------------------------------------
Deposits with financial
institutions 4,115 3,045 10,554
-----------------------------------------------------------------------

Securities
Available for sale (Note 7) 6,634 8,442 9,378
Held for trading 36,396 30,828 34,186
-----------------------------------------------------------------------
43,030 39,270 43,564
-----------------------------------------------------------------------

Securities purchased under
reverse repurchase agreements 8,855 5,966 9,812
-----------------------------------------------------------------------

Loans (Notes 3 and 8)
Residential mortgage 15,044 15,895 14,947
Personal and credit card 13,784 13,116 11,583
Business and government 19,151 19,377 18,406
-----------------------------------------------------------------------
47,979 48,388 44,936
Allowance for credit losses (417) (428) (435)
-----------------------------------------------------------------------
47,562 47,960 44,501
-----------------------------------------------------------------------

Other
Customers' liability under
acceptances 4,533 4,085 4,162
Fair value of derivative
financial instruments 4,233 4,883 2,746
Premises and equipment 433 426 383
Goodwill 702 703 684
Intangible assets 168 169 176
Other assets 6,231 6,295 4,558
-----------------------------------------------------------------------
16,300 16,561 12,709
-----------------------------------------------------------------------
120,124 113,085 121,402
-----------------------------------------------------------------------
-----------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Personal 31,522 30,215 29,628
Business and government 35,285 33,797 30,613
Deposit-taking institutions 6,090 6,561 10,699
Deposit from NBC Capital Trust 225 225 225
-----------------------------------------------------------------------
73,122 70,798 71,165
-----------------------------------------------------------------------

Other
Acceptances 4,533 4,085 4,162
Obligations related to securities
sold short 18,355 16,223 17,803
Securities sold under repurchase
agreements 3,193 2,070 11,844
Fair value of derivative
financial instruments 3,314 3,620 2,024
Other liabilities 9,438 9,087 6,775
-----------------------------------------------------------------------
38,833 35,085 42,608
-----------------------------------------------------------------------
Subordinated debentures 1,656 1,605 1,942
-----------------------------------------------------------------------
Non-controlling interest (Note 11) 1,664 960 714
-----------------------------------------------------------------------

Shareholders' equity (Notes 12 and 14)
Preferred shares 400 400 400
Common shares 1,590 1,575 1,583
Contributed surplus 33 32 24
Retained earnings 2,941 2,793 3,003
Accumulated other comprehensive
income (loss) (115) (163) (37)
-----------------------------------------------------------------------
4,849 4,637 4,973
-----------------------------------------------------------------------
120,124 113,085 121,402
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Consolidated Statement of Income
(unaudited)
(millions of dollars)

------------------------------------------------------------------------
Quarter ended January 31, October 31, January 31,
2008 2007 2007
------------------------------------------------------------------------

Interest income
Loans 762 768 729
Securities available for sale 58 72 68
Securities held for trading 234 214 267
Deposits with financial
institutions 93 102 130
------------------------------------------------------------------------
1,147 1,156 1,194
------------------------------------------------------------------------
Interest expense
Deposits 537 676 659
Subordinated debentures 20 25 25
Other 162 158 234
------------------------------------------------------------------------
719 859 918
------------------------------------------------------------------------
Net interest income 428 297 276
------------------------------------------------------------------------

Other income
Underwriting and advisory fees 95 76 98
Securities brokerage commissions 59 60 69
Deposit and payment service charges 52 54 53
Trading revenues (losses) (Note 6) (68) 99 131
Gains (losses) on available for
sale securities, net 31 (502) 29
Card service revenues 10 3 10
Lending fees 27 33 29
Insurance revenues 34 30 30
Acceptances, letters of credit
and guarantee 18 17 17
Securitization revenues 46 44 48
Foreign exchange revenues 29 28 29
Trust services and mutual funds 79 88 85
Other 89 75 85
------------------------------------------------------------------------
501 105 713
------------------------------------------------------------------------
Total revenues 929 402 989
Provision for credit losses 32 29 29
------------------------------------------------------------------------
897 373 960
------------------------------------------------------------------------
Operating expenses
Salaries and staff benefits 374 336 390
Occupancy 41 42 40
Technology 98 107 98
Communications 19 19 17
Professional fees 44 57 40
Other 56 79 71
------------------------------------------------------------------------
632 640 656
------------------------------------------------------------------------
Income (loss) before income taxes
(recovery) and non-controlling
interest 265 (267) 304
Income taxes (recovery) 67 (123) 56
------------------------------------------------------------------------
198 (144) 248
Non-controlling interest (57) 31 8
------------------------------------------------------------------------
Net income (loss) 255 (175) 240
Dividends on preferred shares 5 5 5
------------------------------------------------------------------------
Net income (loss) available to
common shareholders 250 (180) 235
------------------------------------------------------------------------
Number of common shares
outstanding (thousands)
Average - basic 158,001 157,790 161,681
Average - diluted 158,731 157,790 164,398
End of period 158,141 157,806 161,367
------------------------------------------------------------------------
Earnings (loss) per common
share (dollars)
Basic 1.58 (1.14) 1.45
Diluted 1.58 (1.14) 1.43
Dividends per common share (dollars) 0.62 0.60 0.54
------------------------------------------------------------------------



Consolidated Statement of Comprehensive Income
(unaudited)
(millions of dollars)

------------------------------------------------------------------------
Quarter ended January 31, October 31, January 31,
2008 2007 2007
------------------------------------------------------------------------

Net income (loss) 255 (175) 240
------------------------------------------------------------------------

Other comprehensive income
(loss), net of income taxes

Net unrealized gains (losses) on
translating financial statements
of self-sustaining foreign
operations 101 (195) 79
Impact of hedging net foreign
currency translation gains
or losses (79) 159 (47)
------------------------------------------------------------------------
Net change in unrealized foreign
currency translation gains and
losses, net of hedging activities 22 (36) 32
------------------------------------------------------------------------
Net unrealized gains (losses) on
available for sale financial
assets (17) (18) 22
Reclassification to net income of
(gains) losses on available
for sale financial assets (15) 10 (1)
------------------------------------------------------------------------
Net change in unrealized gains
and losses on available
for sale financial assets (32) (8) 21
------------------------------------------------------------------------
Net gains (losses) on derivative
financial instruments designated
as cash flow hedges 54 15 (21)
Reclassification to net income of
(gains) losses on derivative
financial instruments designated
as cash flow hedges 4 5 2
------------------------------------------------------------------------
Net change in gains and losses on
derivative financial instruments
designated as cash flow hedges 58 20 (19)
------------------------------------------------------------------------

Total other comprehensive income
(loss), net of income taxes 48 (24) 34
------------------------------------------------------------------------

Comprehensive income (loss) 303 (199) 274
------------------------------------------------------------------------
------------------------------------------------------------------------

Income Taxes - Other Comprehensive Income

The income tax charge or recovery for each component of other comprehensive
income is presented in the following table:

-----------------------------------------------------------------------
Quarter ended January 31, October 31, January 31,
2008 2007 2007
-----------------------------------------------------------------------

Net unrealized gains (losses) on
translating financial statements
of self-sustaining foreign
operations 3 (22) -
Impact of hedging net foreign
currency translation gains or
losses (33) 65 (22)
Net unrealized gains (losses) on
available for sale financial
assets (8) 1 8
Reclassification to net income of
(gains) losses on available for
sale financial assets (6) 4 (1)
Net gains (losses) on derivatives
designated as cash flow hedges 25 8 (10)
Reclassification to net income of
(gains) losses on derivative
financial instruments designated
as cash flow hedges 2 2 1
-----------------------------------------------------------------------
Total income taxes (recovery) (17) 58 (24)
-----------------------------------------------------------------------
-----------------------------------------------------------------------



Consolidated Statement of Changes in Shareholders' Equity
(unaudited)
(millions of dollars)

----------------------------------------------------------------------
Quarter ended January 31 2008 2007
----------------------------------------------------------------------

Preferred shares 400 400
----------------------------------------------------------------------

Common shares at beginning 1,575 1,566
Issuance of common shares
Dividend Reinvestment and Share Purchase plan 4 4
Stock Option Plan 11 19
Repurchase of common shares for cancellation (Note 12) - (7)
Impact of shares acquired or sold for
trading purposes - 1
----------------------------------------------------------------------
Common shares at end 1,590 1,583
----------------------------------------------------------------------

Contributed surplus at beginning 32 21
Stock option expense (Note 14) 2 5
Stock options exercised (1) (3)
Other - 1
----------------------------------------------------------------------
Contributed surplus at end 33 24
----------------------------------------------------------------------

Retained earnings at beginning 2,793 2,893
Net income 255 240
Impact of initial adoption of financial
instruments standards - 2
Dividends
Preferred shares (5) (5)
Common shares (98) (88)
Premium paid on common shares repurchased for
cancellation (Note 12) - (39)
Share issuance and other expenses, net of income
taxes (4) -
----------------------------------------------------------------------
Retained earnings at end 2,941 3,003
----------------------------------------------------------------------

Accumulated other comprehensive income (loss) at
beginning, net of income taxes (163) (92)
Impact of initial adoption of financial instruments
standards - 21
Net change in unrealized foreign currency
translation gains (losses), net of
hedging activities 22 32
Net change in unrealized gains (losses) on available
for sale financial assets (32) 21
Net change in gains (losses) on derivative financial
instruments designated as cash flow hedges 58 (19)
----------------------------------------------------------------------
Accumulated other comprehensive income (loss) at
end, net of income taxes (115) (37)
----------------------------------------------------------------------

Shareholders' equity 4,849 4,973
----------------------------------------------------------------------
----------------------------------------------------------------------


Retained Earnings and Accumulated Other Comprehensive Income (Loss),
Net of Income Taxes

----------------------------------------------------------------------
As at January 31 2008 2007
----------------------------------------------------------------------

Retained earnings 2,941 3,003
----------------------------------------------------------------------

Accumulated other comprehensive income (loss), net
of income taxes
Unrealized foreign currency translation gains and
losses, net of hedging activities (158) (60)
Unrealized gains and losses on available for sale
financial assets 36 48
Gains ans losses on derivative financial instruments
designated as cash flow hedges 7 (25)
----------------------------------------------------------------------
(115) (37)
----------------------------------------------------------------------

Total 2,826 2,966
----------------------------------------------------------------------
----------------------------------------------------------------------



Consolidated Statement of Cash Flows
(unaudited)
(millions of dollars)

---------------------------------------------------------------------
Quarter ended January 31 2008 2007
---------------------------------------------------------------------

Cash flows from operating activities
Net income 255 240
Adjustments for:
Provision for credit losses 32 29
Amortization of premises and equipment 20 18
Future income taxes (1) 3
Translation adjustment on foreign currency
subordinated debentures 3 -
Gains on sale of available for sale securities, net (31) (29)
Gains on asset securitizations and other transfers
of receivables, net (31) (31)
Stock option expense 2 5
Change in interest payable (149) 60
Change in interest and dividends receivable 126 119
Change in income taxes payable (3) (22)
Change in fair value of derivative financial
instruments, net 259 (99)
Change in held for trading securities (5,568) (2,322)
Change in other items 521 65
---------------------------------------------------------------------
(4,565) (1,964)
---------------------------------------------------------------------
Cash flows from financing activities
Change in deposits 2,324 (752)
Issuance of NBC CapS II - Series 1 400 -
Issuance of subordinated debentures - 500
Issuance of common shares 15 23
Repurchase of common shares for cancellation - (46)
Dividends paid on common shares (95) (165)
Dividends paid on preferred shares (5) (5)
Change in obligations related to securities
sold short 2,132 2,182
Change in securities sold under repurchase
agreements 1,123 2,327
Change in other items 385 193
---------------------------------------------------------------------
6,279 4,257
---------------------------------------------------------------------
Cash flows from investing activities
Change in deposits with financial institutions
pledged as collateral 122 (22)
Change in loans (excluding securitization) (438) 1,397
Proceeds from securitization of new assets and
other transfers of receivables 1,204 1,018
Maturity of securitized assets (400) -
Purchases of available for sale securities (4,369) (6,086)
Sales of available for sale securities 6,254 3,551
Change in securities purchased under reverse
repurchase agreements (2,889) (2,220)
Change in premises and equipment (27) (16)
---------------------------------------------------------------------
(543) (2,378)
---------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,171 (85)
Cash and cash equivalents at beginning 2,996 10,869
---------------------------------------------------------------------
Cash and cash equivalents at end 4,167 10,784
---------------------------------------------------------------------

Cash and cash equivalents
Cash 262 262
Deposits with financial institutions 4,115 10,554
Less: Amount pledged as collateral (210) (32)
---------------------------------------------------------------------
4,167 10,784
---------------------------------------------------------------------
Supplementary information
Interest paid 868 858
Income taxes paid 54 52
---------------------------------------------------------------------
---------------------------------------------------------------------


Notes to the consolidated financial statements

(unaudited)

(millions of dollars)

These unaudited interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended October 31, 2007. Certain comparative figures have been reclassified to conform with the presentation adopted in fiscal 2008.

1 - Significant Accounting Policies

These unaudited interim consolidated financial statements of the Bank have been prepared in accordance with Canadian generally accepted accounting principles ("GAAP") and the accounting policies described in the Bank's most recent Annual Report for the year ended October 31, 2007, except for the recent accounting standards adopted described in Note 2a). Under Canadian GAAP, additional disclosures are required in annual financial statements and these unaudited interim consolidated financial statements should therefore be read in conjunction with the audited consolidated financial statements for the fiscal year ended October 31, 2007 and the accompanying notes included on pages 84 to 137 of the 2007 Annual Report.

2 - Changes in Accounting Policies

2a) Recent Accounting Standards Adopted

CAPITAL DISCLOSURES AND FINANCIAL INSTRUMENTS - DISCLOSURES AND PRESENTATION

On November 1, 2007, the Bank adopted three new sections of the Canadian Institute of Chartered Accounts (CICA) Handbook, namely Section 1535,
Capital Disclosures, Section 3862, Financial Instruments - Disclosures, and Section 3863, Financial Instruments - Presentation.

Sections 3862 and 3863 consist of a comprehensive series of disclosure and presentation requirements applicable to financial instruments. They revise and enhance the disclosure requirements set out in Section 3861, Financial Instruments - Disclosure and Presentation, and carry forward unchanged its presentation requirements.

ACCOUNTING CHANGES

On November 1, 2007, the Bank adopted the requirements of the new version of Section 1506, Accounting Changes.

The standard specifies that an entity must change an accounting policy only if the change is required by GAAP or in order for the financial statements to provide more relevant information. An entity must account for a change in accounting policy resulting from the application of GAAP in accordance with the specific transitional provisions of the standard, if any. If the standard does not include specific transitional provisions applicable to that change, or if the entity decides to change an accounting policy voluntarily, the change must be applied retrospectively and prior periods adjusted, unless it is impossible to determine the period-specific effects or the cumulative effect of the change.

The standard requires the disclosure of information about changes in accounting estimates during the current period and, unless it is impossible to estimate, for future periods. According to this standard, the entity must disclose that an error has occurred and the period in which it occurred. In this case, the financial statements are restated.

Furthermore, the standard requires that, when a new standard has been issued but is not yet effective, this fact be disclosed along with the expected impact of initial application on the financial statements.

The application of this standard did not have an impact on the Bank's consolidated financial statements.

2b) Recent Accounting Standard Pending Adoption

GOODWILL AND INTANGIBLE ASSETS

In January 2008, CICA Handbook Section 3064, Goodwill and Intangible Assets, was published. This new accounting standard reinforces the approach under which assets are recorded only if they meet the definition of an asset and the recognition criteria for an asset. It also clarifies the application of the concept of matching costs with revenues, so as to eliminate the current practice of recognizing as assets items that do not meet the definition of an asset and the recognition criteria for an asset. On November 1, 2008, the Bank will apply this standard retrospectively with restatement of prior periods. The Bank is currently assessing the impact of the initial application of this standard on its consolidated financial statements.

3 - Management of the Risks Associated with Financial Instruments

The Bank views risk as an integral part of its development and the diversification of its activities. The purpose of sound risk management is to provide reasonable assurance that incurred risks do not exceed acceptable thresholds and that risk-taking contributes to the creation of shareholder value. For the Bank, it means striking a balance between the results obtained and the risks assumed.

The Bank is primarily exposed to the following risks:

Credit risk

Risk of a financial loss if a counterparty to a transaction does not fully honour its contractual commitments to the Bank. Counterparties to transactions may be borrowers, issuers, obligors or guarantors.

Market risk

Risk of a financial loss resulting from unfavourable changes in underlying market factors, namely, interest rates, foreign exchange rates, equity prices, commodity prices, credit risk and market volatility.

Liquidity risk

Risk that the Bank will be unable to honour daily cash commitments without resorting to costly and untimely measures.

Operational risk

Risk of loss resulting from an inadequacy or a failure ascribable to people, processes, technology or external events.

Reputational risk

Risk that the Bank's operations or practices will be judged by the public to be negative, whether that judgment is with or without basis, and will adversely affect the perception, image or trademarks of the Bank, potentially resulting in costly litigation or loss of income.

RISK MANAGEMENT FRAMEWORK

To achieve its risk management objectives, the Bank has created a risk management framework that comprises the following elements.

Risk management culture

The Bank and its management routinely promote a risk management culture through internal communications that advance a balanced model where business development initiatives are accompanied by a constant concern for sound risk management.

Governance structure

The governance structure at National Bank sets out the roles and responsibilities of all levels of the organization.

The Audit and Risk Management Committee (ARMC) of the Board of Directors

The ARMC approves risk management policies and sets risk tolerance limits. In addition to ensuring that the appropriate resources, policies and procedures are in place, it examines and approves all significant aspects of risk assessment systems.

The Bank's Management

The Bank's Management promotes the risk management culture Bank-wide and manages the primary risks to which the Bank is exposed.

The Risk Management Group

This group proposes risk management policies and implements tools and models for identifying, measuring and monitoring risks. In addition to instituting and applying various independent risk review and approval procedures, this group is responsible for setting risk limits that reflect the risk tolerance thresholds established by the Board of Directors and informs Management and the Board of Directors of significant risks.

The Business Units

The business units manage risks related to their operations within established limits and in accordance with risk management policies by identifying, analyzing and understanding the risks to which they are exposed and implement risk mitigation mechanisms.

Risk Management Policies

The risk management policies and related guidelines and procedures describe how business units must manage risk and the approval process for decisions and set the risk limits to be adhered to. These policies are reviewed on a regular basis to ensure that they are still relevant given changes in the markets and the business plans of the Bank's units.

The risk management policies are complemented by additional policies, standards and procedures that cover more specific aspects of management, such as the continuity of certain Bank activities.

Independent oversight by the Corporate Compliance Department

The Bank's Corporate Compliance Department reports directly to the ARMC and helps provide assurance that the Bank's structures, management systems, programs, policies and procedures necessary to ensure compliance with legislation, regulations, guidelines and codes of professional conduct applicable to the Bank are in place and operational.

Independent assessment by the Internal Audit Department

The Internal Audit Department also reports directly to the ARMC and provides an independent, objective assessment of the effectiveness of the processes, policies, procedures and control measures implemented by managers. It also recommends solutions to improve the effectiveness of risk management, internal controls and operations at the Bank and its subsidiaries.

CREDIT RISK MANAGEMENT

Credit risk is the most significant risk facing the Bank. The Bank is exposed to credit risk not only through its direct lending activities and transactions but also through credit commitments such as letters of guarantee or credit, over-the-counter derivatives trading, available for sale debt securities, securities acquired under reverse repurchase agreements, deposits with financial institutions, and transactions carrying a settlement risk for the Bank.

Policy

A policy framework centralizes the governance of activities that generate credit risk for the Bank as a whole. It is supplemented by a series of subordinate internal or sector policies and guidelines used to provide more thorough coverage of the given business lines or deal with specific management issues, such as credit limits or collateral requirements.

Measuring credit risk - loans

The Bank uses a bi-dimensional risk rating system to establish a default risk rating for each counterparty and another risk rating for the credit facility on the basis of the collateral and guarantees that may be provided by the borrower or counterparty. The default risk rating for the counterparty is determined using an internal system by the Bank and is based on a graduated scale from 1 to 10 comprising 19 grades. As each grade corresponds to a borrower's or counterparty's probability of default, the credit risk for the Bank can be determined. The credit risk assessment method varies according to portfolio type.

Consumer and SME credit portfolios

The default risk rating is determined with models that use proven statistical methods that measure an applicant's characteristics and history based on internal and external information to estimate future credit behaviour and assign a risk rating. Consumer credit risk assessments are based on a group of borrowers with similar credit histories and behaviour profiles.

Commercial and government credit portfolios

This category comprises the portfolios of commercial businesses other than SMEs, large corporations, governments, real estate, the energy group, financial institutions, the agricultural group and the cinema and television group.

The default risk rating is assessed individually for each borrower and specifically in relation to the borrower's sector and in relation to its peers. To arrive at an appropriate rating, a detailed individual analysis of the financial and qualitative aspects of the borrower is performed that covers its financial health, sector of economic activity, competitive ability, access to capital and management quality. Moreover, the assessment models developed for each of the above portfolio categories are based on an internal bank of historical data or information from external sources. Loan portfolio managers then complete the information with a subjective evaluation of the qualitative elements.

Credit granting process

Each credit granting decision is made by authorities within the risk management teams and management who are independent of the business units and are at a reporting level commensurate with the size of the proposed credit transaction and the associated risk. Accordingly, a person in a senior position in the organization must approve credit facilities that are substantial or carry a higher risk for the Bank. The Credit Committee, chaired by the Senior Vice-President - Risk Management, manages risks, and approves and monitors all large risks. In exceptional cases, the decision may be submitted to the Board of Directors for approval.

Risk mitigation

The Bank also controls credit risk using risk mitigation techniques. The most common way to mitigate credit risk is to obtain quality collateral. The need to take collateral depends on the level of risk the borrower represents to the Bank and on the type of credit granted. The Bank considers collateral to be of good quality if it can determine its legal validity and correctly measure its value on a regular basis. The Bank has established specific requirements in its internal policies with respect to the appropriate legal documentation and assessment for the kinds of collateral that business units may require in guarantee of the credit they grant. The categories of eligible collateral and the lending value of these assets have also been defined by the Bank. For the most part, they include the following asset categories: accounts receivable; inventory; machinery and equipment; rolling stock; real estate mortgages on residential, commercial and office buildings and industrial facilities; and cash and marketable securities.

Commitments related to the trading of contracts on derivative financial instruments are subject to credit risk mitigation measures. The first, and most widely used, of these measures is the signing of International Swaps and Derivatives Association, Inc. (ISDA) Master Agreements with the appropriate counterparties. These agreements make it possible to apply full netting of the gross amounts of the market price assessments when one of the contracting parties defaults on the agreement, for each of the transactions covered by the agreement and in force at the time of default. The Bank's policies require signing an ISDA agreement with each counterparty trading derivative financial instruments with its traders. Another mechanism for reducing credit risk completes the ISDA Master Agreement in many cases and provides the Bank or its counterparty (or both parties, if need be) with the right to request collateral from the counterparty when the net balance of gains and losses on each transaction exceeds a threshold defined in the agreement. These agreements are known as Credit Support Annexes (CSAs).

Portfolio diversification and management

The Bank is exposed to credit risk not only under its commitments to a particular borrower but also through the sector distribution (activity sector) of its commitments and the exposure of its various credit portfolios to geographical, concentration and settlement risks.

The Bank's approach to controlling these diverse risks begins with optimizing the diversification of its commitments. The management criteria set out in its internal policies and procedures include measures to maintain a healthy degree of diversification of credit risk in its portfolios. These policies define the following limits on the scope of its commitments: credit approval limits by level and credit concentration limits by counterparty, industry, country, region and type of financial instrument. Compliance with these limits is monitored through periodic reports submitted by Risk Management officers to the Board of Directors. The criteria established for portfolio diversification and the specific limits set for economic, industrial or geographical sectors are based on the findings of sector-based studies and analyses conducted by economists and the Bank's Risk Management Group, and are approved by the Credit Committee. Continuous analyses are performed in order to anticipate problems with a sector or borrower before they materialize as defaulted payments.

Other risk mitigation methods

To control credit risk, the Bank also uses synthetic protection mechanisms such as credit derivative financial instruments and securitization, loan syndication and loan assignments and, if required, an orderly reduction in the amount of credit granted.

- Credit derivative financial instruments

Credit default swaps are transactions in which one of the counterparties agrees to pay interest expenses to the other counterparty so that the latter counterparty can make a payment if a credit event occurs. Since, like borrowers, credit protection providers must be assigned a default risk rating, the Bank's internal policies set out the criteria for deeming a counterparty eligible to provide the Bank with credit protection.

- Loan syndication

The Bank states clearly guidelines regarding objectives, responsibilities and documentation requirements.

- Securitization

Securitization is a means for transferring to a third party a portion of the credit risk incurred on loans originally granted by the Bank. A more detailed analysis of this activity is provided in Note 8 to the consolidated financial statements.

Account follow-up and recovery

Credit granted and borrowers are monitored on an ongoing basis and in a manner commensurate with the related risk. Special care is taken by loan portfolio managers with problem loans, which are managed using an array of methods, including a monthly watchlist of problem commitments produced for the loan portfolio managers concerned, who must then submit a report to Credit Risk Management.

When, despite close monitoring, credit commitments continue to deteriorate and risk increases to the point where monitoring has to be increased, a group specialized in managing problem accounts steps in to maximize collection of the committed amounts and tailor strategies to these accounts. This unit's role is critical because, when a borrower defaults, the Bank's primary goal is to recover the maximum amount owing to it.

Identification of impaired loans and provisioning for credit losses

A loan, other than a credit card receivable, is considered impaired when, in the opinion of Management, there is reasonable doubt as to the ultimate collectibility of a portion of principal or interest or where payment of interest is contractually 90 days past due, unless there is no doubt as to the collectibility of the principal or interest. The loan may revert to performing status only when principal and interest payments have become fully current. Credit card receivables are written off when payments are more than 180 days in arrears.

The allowance for credit losses reflects Management's best estimate as at the balance sheet date and relates primarily to loans, but may also cover the credit risk associated with deposits with financial institutions, derivative financial instruments, loan substitute securities and other credit instruments such as acceptances, letters of guarantee and letters of credit. The allowance for credit losses consists of specific allowances for impaired loans and the general allowance for credit risk.

The specific allowances for impaired loans are established for all such loans that can be identified and for which impairment can be estimated individually, reducing them to their estimated realizable amounts.

The general allowance allocated for credit risk represents Management's best estimate of probable losses within the portion of the portfolio that has not yet been specifically identified as impaired. This amount is determined by applying expected loss factors to outstanding and undrawn facilities. The allocated general allowance for corporate and government loans is based on the application of expected default and loss factors, determined by statistical loss migration analysis, delineated by loan type. For more homogeneous portfolios, such as residential mortgage loans, small and medium-sized enterprise loans, personal loans and credit card receivables, the allocated general allowance is determined on a product portfolio basis. Losses are determined by the application of loss ratios established through statistical analysis of loss migration over an economic cycle. The general allowance not allocated for credit risk is based on Management's assessment of probable losses in the portfolio that have not been captured in the determination of the specific allowances for impaired loans and the allocated general allowance. This assessment takes into account general economic and business conditions, recent loan loss experience, and trends in credit quality and concentrations. This allowance also reflects model and estimation risks. The unallocated general allowance does not represent future losses or serve as a substitute for the allocated general allowance.

Maximum credit risk exposure

The amounts shown in the table below represent the Bank's maximum exposure to credit risk as at the balance sheet date without taking into account any collateral held or any other credit enhancements. For financial assets recorded in the balance sheet, the maximum credit risk exposure represents the carrying amount. Letters of guarantee are the Bank's commitment to make payments for a client that does not meet its financial obligations to third parties. Loan commitments are the undrawn portions of credit authorizations provided in the form of loans, acceptances, letters of guarantee and documentary credit.



As at January 31, 2008
-----------------------------------------------------------------------
Maximum exposure
-----------------------------------------------------------------------
Recorded on the Consolidated Balance Sheet
Deposits with financial institutions 4,115
Securities - Available for sale
Debt securities 5,363
Securities purchased under reverse
repurchase agreements 8,855
Loans
Residential mortgage 15,042
Personal and credit card 13,772
Business and government 18,748
Customers' liability under acceptances 4,533
Derivative financial instruments 4,233
Other assets 4,943
-----------------------------------------------------------------------
Total recorded on the Consolidated Balance Sheet 79,604
-----------------------------------------------------------------------
Off-balance sheet
Letters of guarantee 1,692
Loan commitments 24,562
-----------------------------------------------------------------------
Total off-balance sheet 26,254
-----------------------------------------------------------------------
-----------------------------------------------------------------------



GROSS LOANS BY TYPE OF BORROWER

As at January 31, 2008
----------------------------------------------------------------------
Gross loans
----------------------------------------------------------------------

Personal(1) 13,784
Residential mortgage 15,044
Non-residential mortgage 1,379
Agricultural 1,980
Financial institutions 3,844
Manufacturing 2,064
Construction and real estate 1,161
Transportation and communications 494
Mines, quarries and energy 1,233
Forestry 151
Government 1,278
Wholesale 546
Retail 1,209
Services 951
Other 2,861
----------------------------------------------------------------------
47,979
----------------------------------------------------------------------
Securities purchased under reverse repurchase agreements
(financial institutions) 8,855
----------------------------------------------------------------------
----------------------------------------------------------------------

(1) Including consumer loans, credit cards and other personal loans


CREDIT QUALITY OF LOANS

As at January 31, 2008
---------------------------------------------------------------------------
Personal Business
Residential and credit and
mortgages card government(2) Total
---------------------------------------------------------------------------

Neither past due (1)
nor impaired 14,921 13,712 18,963 47,596
Past due but not impaired 97 37 - 134
Impaired 26 35 188 249
---------------------------------------------------------------------------
15,044 13,784 19,151 47,979
Less: Specific allowances 2 12 95 109
---------------------------------------------------------------------------
Sub-total 15,042 13,772 19,056 47,870
---------------------------------------------------------------------------

Less: General allowance(3) 308
---------------------------------------------------------------------------
Total 47,562
---------------------------------------------------------------------------
---------------------------------------------------------------------------

(1) A loan is considered to be past due when the counterparty has not made
a payment the day of the contractual expiry date.
(2) Business credit portfolios are closely monitored and a monthly
watchlist of problem commitments is produced. The watchlist is
analyzed by the loan portfolio managers involved, who must then submit
a report to the management of Credit Risk Management.
(3) The general allowance for credit risk was created taking into account
the Bank's credit in its entirety.


LOANS PAST DUE BUT NOT IMPAIRED

As at January 31, 2008
------------------------------------------------------------------------
Residential Personal
mortgages and credit card
------------------------------------------------------------------------

Past due but not impaired
1 month late 24 14
2 months late 27 10
3 months late and more 46 13
------------------------------------------------------------------------
Total 97 37
------------------------------------------------------------------------
------------------------------------------------------------------------



IMPAIRED LOANS

As at January 31, 2008
------------------------------------------------------------------------
Specific
Gross allowances Net
------------------------------------------------------------------------

Loans
Residential mortgages 26 2 24
Personal and credit card 35 12 23
Business and government loans 188 95 93
------------------------------------------------------------------------
Total 249 109 140
------------------------------------------------------------------------
------------------------------------------------------------------------

As at October 31, 2007
------------------------------------------------------------------------
Specific
Gross allowances Net
------------------------------------------------------------------------

Loans
Residential mortgages 20 1 19
Personal and credit card 36 12 24
Business and government loans 193 107 86
------------------------------------------------------------------------
Total 249 120 129
------------------------------------------------------------------------
------------------------------------------------------------------------


ALLOWANCE FOR CREDIT LOSSES

Quarter ended January 31, 2008
-----------------------------------------------------------------------
Residential Personal and Business and
mortgages credit card government Total
-----------------------------------------------------------------------

Specific allowances at
beginning 1 12 107 120
Provision for credit
losses - 16 16 32
Write-offs - (13) (29) (42)
Write-offs on credit
cards - (17) - (17)
Recoveries 1 14 1 16
-----------------------------------------------------------------------
Specific allowances
at end 2 12 95 109
-----------------------------------------------------------------------

General allowance(1) 308
-----------------------------------------------------------------------
Allowances at end 2 12 95 417
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Quarter ended January 31, 2007
-----------------------------------------------------------------------
Residential Personal and Business and
mortgages credit card government Total
-----------------------------------------------------------------------

Specific allowances at
beginning 2 16 100 118
Provision for credit
losses - 17 12 29
Write-offs (1) (11) (5) (17)
Write-offs on credit
cards - (17) - (17)
Recoveries 1 13 - 14
-----------------------------------------------------------------------
Specific allowances
at end 2 18 107 127
-----------------------------------------------------------------------

General allowance(1) 308
-----------------------------------------------------------------------
Allowances at end 2 18 107 435
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(1) The general allowance for credit risk was created taking into account
the Bank's credit in its entirety.


MARKET RISK MANAGEMENT

Market risk is intrinsically interlinked with participation in financial markets. Managing this risk is a core competency for the Bank in its trading, investing and asset/liability management activities.

Assessing market risk

One of the main tools used to manage market risk is the Value-at-Risk (VaR) simulation model. VaR is the maximum value of potential daily losses, in the portfolios held, measured at a 99% confidence level, which means that actual losses are likely to exceed the value only one day out of 100. VaR is calculated on an ongoing basis for both major classes of financial instruments, including derivative financial instruments, and all portfolios of the Financial Markets segment of the Bank. The VaR calculation model is based on two years of historical data.

The Bank monitors VaR daily in relation to established limits for each portfolio and business unit, as well as by type of activity: trading, investing and asset/liability management. Moreover, investment portfolio activities are governed by a special guideline. In this way, the Bank seeks to ensure that trading and investment decisions do not entail risks in excess of preset limits.

In addition, the Bank carries out backtesting in order to verify the capacity of the Bank's VaR model to estimate the maximum risk of market losses and thus validate, retroactively, the quality of the results obtained using the model.

The VaR model simulates losses in market situations similar to those revealed by historical data, namely, normal market conditions. The Bank also seeks to simulate the impact of abnormal situations, i.e., rare events, on the various portfolios of the Financial Markets segment. The Bank accordingly conducts daily stress tests and sensitivity analyses for all risk categories: interest rate risk, equity and commodity price risk, foreign exchange risk and market volatility risk. These many tests simulate the results that the portfolios of the Financial Markets segment would generate if the extreme scenarios in question were to occur. The Bank sets maximum potential loss limits for stress tests and sensitivity analyses. These limits are approved by the Board of Directors. The stress tests and sensitivity analyses are developed jointly by the Market Risk Management Group and the management of the business units, and are regularly reviewed to take into account changes in market conditions, new products and trading strategies.

Trading activities

VaR is a key market risk management tool for trading activities. The following table illustrates the VaR distribution of trading portfolios by risk category, as well as the risk diversification effect.



GLOBAL VaR BY RISK CATEGORY (1)

-----------------------------------------------------------------------
Quarter ended January 31, October 31,
2008 2007
-----------------------------------------------------------------------
Low High Average Period end Period end
-----------------------------------------------------------------------
Interest rate (3.3) (5.7) (4.5) (4.9) (3.4)
Foreign exchange (1.4) (3.4) (2.4) (2.3) (1.7)
Equity (3.7) (7.7) (5.1) (5.0) (7.0)
Commodity (0.9) (3.1) (1.6) (1.7) (1.8)
Correlation effect(2) n.a. n.a. 7.0 5.6 8.5
-----------------------------------------------------------------------
Global VaR (5.3) (9.4) (6.6) (8.3) (5.4)
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(1) Amounts are presented on a pre-tax basis and represent one-day VaR.
(2) The correlation effect is the result of the diversification of types of
risks.


Structural interest rate risk

As part of its non-trading activities, such as granting mortage loans and accepting term deposits, the Bank is exposed to structural interest rate risk. Interest rate movements cause changes in interest income and interest expense and, although these fluctuations do not move in the same direction, their relative magnitude will favourably or unfavourably impact annual net interest income and the economic value (present value of estimated cash flows) of shareholders' equity. The extent of that impact depends on several factors, including asset and liability matching and the interest rate curve. Assets and liabilities are managed to optimize the impact of interest rate movements in view of anticipated rate changes.

Regular simulations are performed to assess the impact of various scenarios on annual net interest income and the economic value of shareholders' equity and to guide the management of structural interest rate risk.

Interest rate risk is managed under a specific policy, the revision and application of which are overseen by various management committees, among others. The policy sets risk limits based on the impact of a 100-basis-point change in interest rates on the following parameters: annual net interest income, economic value and duration of shareholders' equity.

The following table provides the potential before tax impact of an immediate and sustained 100-basis-point and 200-basis-point increase in interest rates on net interest income and on the economic value of shareholders' equity of the Bank's non-trading portfolio, assuming that no further hedging is undertaken.



INTEREST RATE SENSITIVITY - NON-TRADING (BEFORE TAX)

-----------------------------------------------------------------------
As at January 31 2008 2007
-----------------------------------------------------------------------

100-basis-point increase in the interest rate
Impact on net interest income
(for the next 12 months) (5) (27)
Impact on shareholders' equity (76) (85)

200-basis-point increase in the interest rate
Impact on net interest income
(for the next 12 months) (14) (58)
Impact on shareholders' equity (153) (173)
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Hedge of structural interest rate and foreign exchange risk

Hedge of a net investment in a self-sustaining foreign operation

The Bank's structural foreign exchange risk arises primarily from investments in self-sustaining foreign operations denominated in currencies other than the Canadian dollar. This risk is measured by assessing the impact of currency fluctuations. The Bank uses financial instruments denominated in foreign currencies to hedge structural foreign exchange risk. In a hedge of a net investment in a self-sustaining foreign operation, the financial instruments used will offset foreign exchange gains and losses on the investments.

For the quarter ended January 31, 2008, unrealized foreign exchange gains of $104 million were recorded in Other comprehensive income related to the Bank's net investment in self-sustaining foreign operations and were offset by losses of $112 million related to financial instruments designated as foreign exchange risk hedges. These financial instruments represent foreign currency denominated liabilities and totalled $2.1 billion as at January 31, 2008.

Fair value hedge

Fair value hedge transactions mainly use interest rate swaps to hedge changes in the fair value of a financial asset or liability arising from changes in market interest rates. In a fair value hedge, the change in fair market value of the derivative financial instruments used as hedging items will offset the change in fair value of the hedged item. The Bank uses this strategy primarily for its securities, deposit and subordinated debenture portfolios.

For the quarter ended January 31, 2008, the amount representing the ineffective portion recognized as Other income in the Consolidated Statement of Income was negligible. All the components of the change in fair market value of the derivative financial instruments used were taken into account in assessing the effectiveness of the fair value hedge.

Cash flow hedge

Cash flow hedge transactions mainly use interest rate swaps to hedge exposure of the future cash flows related to a floating rate financial asset or liability. In a cash flow hedge, the derivative financial instruments used as hedging items will mitigate the variability in future cash flows related to the hedged item. The Bank uses this strategy primarily for its loan portfolio.

For the quarter ended January 31, 2008, an unrealized gain of $79 million was recorded in Other comprehensive income for the effective portion of changes in fair value of derivative financial instruments designated as cash flow hedges. The amounts recognized are reclassified to Net interest income in the periods during which the variability in cash flows of the hedged items affects net interest income. Consequently, a net loss of $6 million was reclassified to Net income in the quarter ended January 31, 2008. An estimated net gain of $14 million deferred in Accumulated other comprehensive income as at January 31, 2008 is expected to be reclassified to Net income during the next 12 months. The maximum period over which the Bank hedges its exposure to the variability in future cash flows is five years.

For the quarter ended January 31, 2008, the amount representing the ineffective portion recognized as Other income in the Consolidated Statement of Income was negligible. All the components of the change in fair value of the derivative financial instruments used were taken into account in assessing the effectiveness of the cash flow hedge.

LIQUIDITY RISK MANAGEMENT

Liquidity risk arises when sources of funds become insufficient to meet scheduled payments under the Bank's commitments. Liquidity risk stems from two sources: mismatched cash flows related to assets and liabilities and the characteristics of certain products, such as credit commitments and demand deposits.

The Bank strives to meet the following objectives at all times:

- honour all cash outflow commitments (both on- and off-balance sheet) on a continuous basis;

- avoid situations where funds have to be raised quickly, resulting in the Bank having to pay excessive funding costs or sell readily marketable assets under unfavourable conditions;

- adhere to risk limits; and

- closely follow the best practices used in the market and changes in liquidity regulations.

The Board is ultimately responsible for the liquidity management and funding policy. The Bank's liquidity management is governed by establishing a prudent policy that identifies oversight responsibilities, as well as setting limits and implementing effective techniques to monitor, measure and control exposure to liquidity risk.

Funding management and diversification

Core deposit liabilities are the Bank's primary funding source. In this context, diversification of funding by origination and term structure is an important element of a liquidity management strategy.

The Bank aims to achieve a diversified source of funding by geographical location, currency, instrument and depositor or counterparty in both the secured and unsecured borrowing markets. Furthermore, the Bank has been actively engaged in securitization programs that give it access to long-term funding and act as a capital management tool.

To ensure stability of market access, the Bank maintains and develops direct relationships with the major money lenders active on the Canadian money market, pursues and develops activities on inter-bank and corporate markets in the United States, Europe and Asia, and favours extending the terms of term deposits whenever this proves economically advantageous and strategically desirable.

Liquidity risk measurement

Liquidity risk is managed on a consolidated basis by assigning limits to a set of risk measures. Short-term day-to-day funding decisions are based on a daily cumulative net cash profile. Long-term funding and liquidity decisions are based on net cash capital, survival period and liquidity ratios, enabling the Bank to strike an optimal balance between long-term funding and purchased funds.

Furthermore, the Bank restricts its reliance on any one depositor and thereby avoids an unnecessary concentration of deposits from a single source. For this reason, purchased funds are limited to a percentage of total deposits and a maximum amount per depositor has been established.

Finally, a detailed liquidity contingency plan is outlined in the Policy.

The following table shows financial liabilities and loan commitments by contractual maturity, except for the fair value of derivative financial instruments held for trading and commitments related to securities sold short.



As at January 31, 2008
---------------------------------------------------------------------------
Payable Payable
on after
demand notice Payable on a fixed date
---------------------------------------------------------------------------
Less than 1 to 2 2 to 5 More than
1 year years years 5 years Total
---------------------------------------------------------------------------
Personal 3,134 13,272 7,806 3,366 3,911 33 31,522
Other 7,083 6,347 22,783 1,442 2,392 1,553 41,600
---------------------------------------------------------------------------
Total deposits 10,217 19,619 30,589 4,808 6,303 1,586 73,122
---------------------------------------------------------------------------
Less than 1 to 2 2 to 5 More than
1 year years years 5 years Total
---------------------------------------------------------------------------
Designated
derivative
financial
instruments
Fair value
hedges 5 6 7 10 28
Cash flow
hedges - - 40 4 44
---------------------------------------------------------------------------
Total
designated
derivative
financial
instruments 5 6 47 14 72
---------------------------------------------------------------------------
Subordinated
debentures 12 250 500 894 1,656
---------------------------------------------------------------------------
Loan
commitments 24,562 - - - 24,562
---------------------------------------------------------------------------
---------------------------------------------------------------------------


4 - Capital Disclosure

CAPITAL MANAGEMENT OBJECTIVES, POLICIES AND PROCEDURES

Capital management consists in maintaining the balance between risk-adjusted capital, regulatory capital ratios that satisfy the minimum requirements for a well-capitalized financial institution, as defined by the Office of the Superintendent of Financial Institutions (the "Superintendent"), and production of a competitive return on shareholders' equity.

Each year, the Board of Directors, on the recommendation of the ARMC, approves a detailed capital management policy and the Bank's capital plan. This policy sets out the principles and practices the Bank incorporates into its capital management strategy and the basic criteria it adopts to ensure that it has sufficient capital at all times and prudently manages such capital in view of its future capital requirements. The capital plan sets operational targets and takes into account expected levels for risk-weighted assets, determined under the regulatory approach. Moreover, the capital plan presents an analysis of the different strategies that are available to the Bank to optimize capital management, including the issuance and repurchase of equity securities and subordinated indebtedness and the dividend policy.

CAPITAL MANAGEMENT

The capital ratio is the ratio, expressed as a percentage, of regulatory capital to risk-weighted assets. The definition adopted by BIS distinguishes between three types of capital: Tier 1 capital, or base capital, which consists of common shareholders' equity, non-cumulative preferred shareholders' equity and non-controlling interests in subsidiaries, less goodwill; and Tier 2 capital, or supplementary capital, which consists of the book value of other preferred shares, the eligible portion of subordinated debentures and the general allowance for credit risk. In accordance with BIS rules, the Superintendent defines a third tier of capital intended specifically to cover market risk, which must also be covered by Tier 1 capital. Total regulatory capital, or total capital, is the sum of the various types of capital less investments in companies subject to significant influence and first-loss protection with respect to asset securitization.

On November 1, 2007, the Bank adopted the requirements of the new Basel II capital standards framework. These new rules, established in 2004 by the BIS in Basel, Switzerland, and adopted by many countries around the world, including Canada, amend the capital adequacy rules introduced in 1988.

Since November 1, 2007, the Bank has been using the standardized approach for credit risk. This approach is almost identical to the one used as at October 31, 2007. Beginning in fiscal 2010, the Bank will adopt the Advanced Internal Ratings-Based Approach, which provides for enhanced sensitivity of capital to the credit risk of borrowers and counterparties with which the Bank does business. The Bank has been using the standardized approach for operational risk since November 1, 2007. This approach imposes a capital charge to cover operational risk.

The Superintendent considers financial institutions to be well-capitalized if they maintain a Tier 1 capital ratio of 7% and a total capital ratio of 10%. The Bank maintained ratios that satisfied these requirements both in the fourth quarter of 2007 and in the first quarter of 2008.

In addition to regulatory capital ratios, banks are expected to meet an assets-to-capital multiple test. The assets-to-capital multiple is calculated by dividing a bank's total assets, including specified off-balance sheet items, by its total capital. Under this test, total assets should not be greater than 23 times total capital. The Bank met the assets-to-capital multiple test both in the fourth quarter of 2007 and in the first quarter of 2008.



REGULATORY CAPITAL Basel II Basel I
-----------------------------------------------------------------------
January 31, 2008 October 31, 2007
-----------------------------------------------------------------------
Tier 1 capital
Common shares 1,590 1,575
Contributed surplus 33 32
Retained earnings 2,941 2,793
Unrealized foreign exchange gains and
losses, net of hedging activities
included in Accumulated other
comprensive income (158) (181)
Non-cumulative permanent preferred shares 400 400
Innovative instruments(1) 721 509
Non-controlling interest(2) 18 18
Trading in short positions of own
shares (1) (1)
-----------------------------------------------------------------------
Gross Tier 1 Capital 5,544 5,145
Goodwill (702) (703)
-----------------------------------------------------------------------
Net Tier 1 Capital 4,842 4,442
Gains on sales recorded upon
securitization (27) --
-----------------------------------------------------------------------
Adjusted Net Tier 1 Capital 4,815 4,442
-----------------------------------------------------------------------
Tier 2 capital
Subordinated debentures 1,644 1,641
Eligible general allowance for credit
risk 308 308
Accumulated net after tax unrealized
gains on available for sale equity
securities included in Accumulated
other comprensive income 48 80
Excess Tier 1 qualifying innovative
instruments(1) 205 -
Other deductions (377) (355)
-----------------------------------------------------------------------
Adjusted Tier 2 capital 1,828 1,674
-----------------------------------------------------------------------
Total capital 6,643 6,116
-----------------------------------------------------------------------
-----------------------------------------------------------------------

(1) 300,000 preferred shares, Series A, exchangeable, non-cumulative
dividends issued by NB Capital Corporation and 400,000 NBC CapS II -
Series 1 issued by NBC Asset Trust presented in non-controlling
interest and the $225 million deposit from NBC Capital Trust
(2) Excluding 300,000 preferred shares, Series A, exchangeable, non-
cumulative dividends, issued by NB Capital Corporation, 400,000 NBC
CapS II - Series 1 issued by NBC Asset Trust, mutual funds and other
entities consolidated pursuant to the application of AcG-15


5 - Carrying Values of Financial Assets and Financial Liabilities by Category

Financial assets and liabilities are recognized in the Consolidated Balance Sheet at fair value, cost or amortized cost according to the categories determined by the accounting framework for financial instruments. The carrying values for each category of financial asset and liability are presented in the table below.



As at January 31, 2008
--------------------------------------------------------------------------
Designated
as held
Held for for Available Loans and
trading trading for sale receivables
--------------------------------------------------------------------------

FINANCIAL ASSETS
Cash 262 - - -
Deposits with financial
institutions - - 493 3,622

Securities
Available for sale - - 6,634 -
Held for trading 36,396 - - -

Securities purchased under
reverse repurchase
agreements - - - 8,855


Loans - - - 47,562

Other
Customers' liability under
acceptances - - - 4,533
Fair value of derivative
financial instruments 4,031 - - -
Other assets - - - 4,943
--------------------------------------------------------------------------
Total financial assets 40,689 - 7,127 69,515
--------------------------------------------------------------------------

FINANCIAL LIABILITIES
Deposits
Personal - - - -
Business and government - 333 - -
Deposit-taking institutions - - - -
Deposit from NBC Capital Trust - - - -

Other
Acceptances - - - -
Obligations related to
securities sold short 18,355 - - -
Securities sold under
repurchase agreements - - - -
Fair value of derivative
financial instruments 3,242 - - -
Other liabilities - - - -

Subordinated debentures - - - -
--------------------------------------------------------------------------
Total financial liabilities 21,597 333 - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------


As at January 31, 2008
--------------------------------------------------------------------------
Derivative Derivative
Financial financial financial
liabilities instruments instruments
at cost or designated as designated as
amortized cash flow fair value
cost hedges hedges
--------------------------------------------------------------------------

FINANCIAL ASSETS
Cash - - -
Deposits with financial
institutions - - -

Securities
Available for sale - - -
Held for trading - - -

Securities purchased under
reverse repurchase agreements - - -

Loans - - -

Other
Customers' liability under
acceptances - - -
Fair value of derivative
financial instruments - 37 165
Other assets - - -
--------------------------------------------------------------------------
Total financial assets - 37 165
--------------------------------------------------------------------------

FINANCIAL LIABILITIES
Deposits
Personal 31,522 - -
Business and government 34,952 - -
Deposit-taking institutions 6,090 - -
Deposit from NBC Capital Trust 225 - -

Other
Acceptances 4,533 - -
Obligations related to
securities sold short - - -
Securities sold under
repurchase agreements 3,193 - -
Fair value of derivative
financial instruments - 44 28
Other liabilities 8,470 - -

Subordinated debentures 1,656 - -
--------------------------------------------------------------------------
Total financial liabilities 90,641 44 28
--------------------------------------------------------------------------
--------------------------------------------------------------------------


As at October 31, 2007
--------------------------------------------------------------------------
Designated
as held
Held for for Available Loans and
trading trading for sale receivables
--------------------------------------------------------------------------

FINANCIAL ASSETS
Cash 283 - - -
Deposits with financial
institutions - - 836 2,209

Securities
Available for sale - - 8,442 -
Held for trading 30,828 - - -

Securities purchased under
reverse repurchase
agreements - - - 5,966

Loans - - - 47,960

Other
Customers' liability under
acceptances - - - 4,085
Fair value of derivative
financial instruments 4,702 - - -
Other assets - - - 5,194
--------------------------------------------------------------------------
Total financial assets 35,813 - 9,278 65,414
--------------------------------------------------------------------------

FINANCIAL LIABILITIES
Deposits
Personal - - - -
Business and government - 297 - -
Deposit-taking institutions - - - -
Deposit from NBC Capital Trust - - - -

Other
Acceptances - - - -
Obligations related to
securities sold short 16,223 - - -
Securities sold under
repurchase agreements - - - -
Fair value of derivative
financial instruments 3,319 - - -
Other liabilities - - - -

Subordinated debentures - - - -
--------------------------------------------------------------------------
Total financial liabilities 19,542 297 - -
--------------------------------------------------------------------------
--------------------------------------------------------------------------



As at October 31, 2007
--------------------------------------------------------------------------
Derivative Derivative
Financial financial financial
liabilities instruments instruments
at cost or designated as designated as
amortized cash flow fair value
cost hedges hedges
--------------------------------------------------------------------------

FINANCIAL ASSETS
Cash - - -
Deposits with financial
institutions - - -

Securities
Available for sale - - -
Held for trading - - -

Securities purchased under
reverse repurchase
agreements - - -

Loans - - -

Other
Customers' liability under
acceptances - - -
Fair value of derivative
financial instruments - 2 179
Other assets - - -
--------------------------------------------------------------------------
Total financial assets - 2 179
--------------------------------------------------------------------------

FINANCIAL LIABILITIES
Deposits
Personal 30,215 - -
Business and government 33,500 - -
Deposit-taking institutions 6,561 - -
Deposit from NBC Capital Trust 225 - -

Other
Acceptances 4,085 - -
Obligations related to securities
sold short - - -
Securities sold under repurchase
agreements 2,070 - -
Fair value of derivative
financial instruments - 85 216
Other liabilities 7,541 - -


Subordinated debentures 1,605 - -
--------------------------------------------------------------------------
Total financial liabilities 85,802 85 216
--------------------------------------------------------------------------
--------------------------------------------------------------------------


6 - Total Income from Trading Activities

Total income from trading activities comprises net interest income from trading activities, trading revenues recognized as Other income and the impact of non-controlling interest.

Net interest income comprises interest and dividends relating to financial assets and liabilities associated with trading activities, net of interest expenses and interest income related to the financing of these financial assets and liabilities.

Other income comprises the realized and unrealized gains and losses on securities held for trading, income from derivative financial instruments held for trading purposes and the change in fair value of financial liabilities designated as held for trading.

The impact of non-controlling interest takes into account trading revenues and losses attributable to third parties.

TOTAL INCOME FROM TRADING ACTIVITIES



--------------------------------------------------------------------------
Quarter ended January 31 2008 2007
--------------------------------------------------------------------------

Net interest income 116 (39)
Other income (68) 131
Non-controlling interest 62 (1)
--------------------------------------------------------------------------
Total 110 91
--------------------------------------------------------------------------
--------------------------------------------------------------------------


7 - Available for Sale Financial Assets

Financial assets classified as available for sale comprise securities and certain negotiable certificates of deposit.



As at January 31, 2008
--------------------------------------------------------------------------
Cost or Gross Gross
unamortized unrealized unrealized Carrying
cost gains losses value
--------------------------------------------------------------------------
Securities issued or
guaranteed by:
Canada 2,135 5 (16) 2,124
Provinces 864 5 - 869
Municipalities or school
boards 1 - - 1
U.S. Treasury and other
U.S. agencies 40 - (1) 39
Other debt securities 2,327 10 (7) 2,330
Equity securities 1,198 121 (48) 1,271
--------------------------------------------------------------------------
Total available for sale
securities 6,565 141 (72) 6,634
Other available for sale
financial assets 493 - - 493
--------------------------------------------------------------------------
Total available for sale
financial assets 7,058 141 (72) 7,127
--------------------------------------------------------------------------


Financial assets classified as available for sale are measured periodically to determine whether there is objective evidence of an other-than-temporary impairment in value. Gross unrealized losses on equity securities are mainly caused by market price fluctuations or foreign exchange movements. The Bank has the ability and intent to hold these securities for a period of time sufficient to allow for any recovery of their fair value. As at January 31, 2008, the Bank concluded that the gross unrealized losses were temporary.

Available for sale securities presented at cost

The Bank holds equity securities such as mutual fund units and other securities that are classified as available for sale but are presented at cost because they are not traded in an active market. These available for sale securities presented at cost in the Consolidated Balance Sheet totalled $468 million. The fair value of some of these securities could be estimated. The difference between the estimated fair value and the cost of these securities totalled a gain of $51 million.

Asset-backed commercial paper

On December 23, 2007, the Pan-Canadian Investors Committee for Third-Party Structured Asset Backed Commercial Paper approved an agreement in principle to restructure 43 series of asset-backed commercial paper (ABCP) issued by 20 trusts. The restructuring plan will extend the maturity of the ABCP to provide for a maturity similar to that of the underlying assets. Trusts with ABCP supported in whole or in part by synthetic assets will pool their assets. Floating rate notes will be issued in exchange for their existing ABCP, with maturities based upon the maturities of the underlying pooled assets which are expected to be an average of seven years. Trusts with ABCP supported solely by traditional securitized assets will be restructured on a series-by-series basis, with each trust or series maintaining its separate assets. Noteholders will receive floating rate notes with maturities based upon the maturity of the underlying assets which will amortize and be repaid as assets mature or are sold. Trusts with ABCP supported by "ineligible" assets for which the credit quality is uncertain, principally as a result of exposure to sub-prime or home equity loan mortgages in the United States, will be restructured on a series-by-series basis, with each series maintaining its separate exposure to its own assets. Noteholders will receive floating rate notes with maturities based upon the maturity of the underlying assets which will amortize and be repaid as assets mature or are sold.

Taking into account this additional information and the higher probability of a successful restructuring of the ABCP, the Bank adjusted its valuation approach in order to assess the fair value of the ABCP it was holding as at January 31, 2008. For most of the ABCP held, the Bank considered the very high quality of the underlying assets and determined the fair value using a discounted cash flow analysis. The main assumptions pertain to the expected coupons, the expected maturity of the floating rate notes received in exchange of the ABCP, the expected rating and an appropriate discount rate taking into account risks of future losses. The expected discount rate is determined based on observable market inputs for comparable securities.

For ABCP that is not restructured or not under the Pan-Canadian Investors Committee process, as well as for ABCP supported by ineligible assets, observable market inputs for comparable securities from independent pricing sources were used to assess the fair value of each class of assets in the trusts.

To determine the value of the ABCP it holds, the Bank established a range of estimated fair value. Since the carrying value of the ABCP held by the Bank as of October 31, 2007 is within the range of the estimated fair value established as of January 31, 2008, no change was made to the carrying value as of January 31, 2008. The carrying value of the ABCP held by the Bank, as of January 31, 2008, was $1,707 million of which $1,580 million was classified in Available for sale securities and $127 million was classified in Held for trading securities.

The Bank's valuation was based on its assessment of the conditions prevailing as at January 31, 2008, which may change in subsequent periods. Determining the fair value of ABCP is complex and involves an extensive process that includes the use of quantitative modeling and relevant assumptions. Possible changes that could have a material effect on the future value of the ABCP include (1) changes in the value of the underlying assets, (2) developments related to the liquidity of the ABCP market, (3) the outcome of the restructuring of the conduits and (4) a slowdown in economic conditions in North America.

8 - Transfers of Receivables

NEW SECURITIZATION ACTIVITIES

Insured mortgage loans

The Bank securitizes insured residential mortgage loans by creating mortgage-backed securities. The pre-tax gain or loss from securitization transactions, net of transaction fees, is recognized in the Consolidated Statement of Income under Securitization revenues.



Securitization activities for the quarter ended
--------------------------------------------------------------------------
January 31, October 31, January 31,
2008 2007 2007
--------------------------------------------------------------------------

Net cash proceeds 1,204 968 918
Retained interests 29 22 27
Retained servicing liability (7) (5) (5)
--------------------------------------------------------------------------
1,226 985 940
Receivables securitized and sold 1,208(1) 980(2) 926
--------------------------------------------------------------------------
Gain before income taxes, net of
transaction fees 18 5 14
--------------------------------------------------------------------------
Mortgage-backed securities created
and retained included in Securities
available for sale 455 74 -
--------------------------------------------------------------------------
--------------------------------------------------------------------------

(1) Includes $181 million in receivables securitized in previous fiscal
years
(2) Includes $45 million in receivables securitized in the third quarter of
2007 and in previous fiscal years.


MATURITY

Credit card receivables

Certificates totalling $400 million, issued by a trust during fiscal 2003 under a securitization program and backed by credit card receivables of the Bank, matured in January 2008. As a result, gross outstanding securitized credit card receivables decreased from $1.2 billion as at October 31, 2007 to $800 million as at January 31, 2008.

IMPACT OF SECURITIZATION ACTIVITIES ON CERTAIN ITEMS IN THE CONSOLIDATED STATEMENT OF INCOME



Securitization revenues for the quarter ended January 31
---------------------------------------------------------------------------
Gains on sale Servicing
of assets revenues Other Total
---------------------------------------------------------------------------
2008 2007 2008 2007 2008 2007 2008 2007
---------------------------------------------------------------------------

Insured mortgage loans 18 14 5 4 - - 23 18
Credit card receivables(1) 13 17 6 4 4 9 23 30
---------------------------------------------------------------------------
Total 31 31 11 8 4 9 46 48
---------------------------------------------------------------------------
--------------------------------------------------------------------------

(1) Revolving securitization transactions


KEY ASSUMPTIONS

The key assumptions used to measure the fair value of retained interests as at the securitization date for transactions carried out during the quarter ended January 31, 2008 were as follows.



----------------------------------------------------------------------
Insured Credit card
mortgage loans receivables
----------------------------------------------------------------------

Weighted average term (months) 29.2 -
Payment rate (per month) - 24.8%
Prepayment rate 17.0% -
Excess spread, net of credit losses 1.1% 10.9%
Expected credit losses - 3.7%
Discount rate 4.2% 17.0%
----------------------------------------------------------------------
----------------------------------------------------------------------


9 - Financial Assets Transferred but Not Derecognized

As part of its operations, the Bank concludes transactions in which it transfers financial assets to a third party but which are presented in the Consolidated Balance Sheet because they do not meet the criteria for derecognition.

The carrying values of these transferred financial assets are presented in the table below:



--------------------------------------------------------------------------
January 31, 2008 October 31, 2007
--------------------------------------------------------------------------

Securities sold under repurchase
agreements 3,078 1,921
Loaned securities 5,458 4,103
--------------------------------------------------------------------------


10 - Held for Trading Financial Liabilities

Certain deposits with one or more embedded derivatives are designated as held for trading. These deposits are included under liabilities in Deposits in the Consolidated Balance Sheet.

The fair value of these deposits totalled $333 million as at January 31, 2008. The $21 million change in fair value for the quarter was recorded as a gain in Trading revenues in the Consolidated Statement of Income. This change was entirely caused by factors other than changes attributable to credit risk.

The amount at maturity, which the Bank will be contractually required to pay to the holders of these deposits, may vary and will be different from the fair value as at January 31, 2008.

11 - Non-Controlling Interest



--------------------------------------------------------------------------
Denominated
in foreign January 31, October 31,
currency 2008 2007
--------------------------------------------------------------------------
400,000 NBC CapS II - Series 1
issued by NBC Asset Trust(1) 400 -
300,000 preferred shares,
Series A, exchangeable,
non-cumulative dividends,
issued by NB Capital
Corporation(2) US 300 301 284
Mutual funds consolidated in
accordance with AcG-15 23 26
Other entities consolidated in
accordance with AcG-15 922 630
Other 18 20
--------------------------------------------------------------------------
Total 1,664 960
--------------------------------------------------------------------------
--------------------------------------------------------------------------


(1) On January 22, 2008, the Bank issued 400,000 non-voting transferable trust units called Trust Capital Securities - Series 1 or "NBC CapS II - Series 1" through its subsidiary NBC Asset Trust (the "Trust"), a closed-end trust established under the laws of Ontario. These securities are not redeemable or exchangeable for Bank preferred shares at the option of the holder. The $400 million in gross proceeds from the investment was used by the Trust to finance the acquisition of mortgage co-ownership interests from the Bank.

The non-cumulative fixed cash distribution per NBC CapS II - Series 1 payable on June 30, 2008 will be $31.715. Thereafter, this distribution will be $36.175 (representing a per annum yield of 7.235% of the $1,000 initial issue price) to be paid by the Trust semi-annually from December 31, 2008 to June 30, 2018, inclusive. Each distribution made after June 30, 2018 will be determined by multiplying $1,000 by one-half of the sum of the applicable bankers' acceptance rate in effect plus 3.79%. No cash distributions will be payable by the Trust on NBC CapS II - Series 1 if the Bank fails to declare regular dividends on its preferred shares or, if no preferred shares are then outstanding, on its outstanding common shares. In this case, the net distributable funds of the Trust will be paid to the Bank as the sole holder of the special trust securities, representing the residual interest in the Trust. Should the Trust fail to pay the semi-annual distributions in full on the NBC CapS II - Series 1, the Bank will withhold from declaring dividends on any of its preferred and common shares during a determined period.

On or after June 30, 2013, or prior to that date upon the occurrence of a predetermined regulatory event or tax event, the Trust may, at its option, redeem the NBC CapS II - Series 1 in whole without the consent of the holders, with prior written notice and with Superintendent approval.

On or after January 22, 2013, the Trust may, with Superintendent approval, purchase the NBC CapS II - Series 1, in whole or in part, in the open market or by tender or private contract at any price. The NBC CapS II - Series 1 purchased by the Trust will be cancelled and will not be reissued.

Each NBC CapS II - Series 1 will be exchanged automatically, without the consent of the holders, for 40 First Preferred Shares, Series 19 of the Bank upon the occurrence of one of the following events: i) proceedings are commenced for the winding-up of the Bank; ii) the Superintendent takes control of the Bank; iii) the Bank posts a Tier 1 capital ratio of less than 5% or a total capital ratio of less than 8%; or iv) the Superintendent has directed the Bank to increase its capital or to provide additional liquidity and the Bank elects to cause such automatic exchange or the Bank does not comply with such direction to the satisfaction of the Superintendent. The First Preferred Shares, Series 19 of the Bank will pay semi-annual, non-cumulative cash dividends and will be redeemable at the Bank's option, with Superintendent approval, as of June 30, 2013, but will not be redeemable at the option of the holders. Upon an automatic exchange, the Bank will hold all capital securities outstanding of the Trust.

For regulatory capital purposes, the NBC CapS II - Series 1 in the amount of $400 million qualify as innovative instruments and are eligible as Tier 1 capital. According to the guidelines of the Superintendent, innovative instruments may consist of a portion representing up to 15% of net Tier 1 capital and an additional portion of 5% eligible as Tier 2B capital.

(2) Annual dividend of 8.35% payable quarterly on March 30, June 30, September 30 and December 30. These preferred shares do not have voting rights. They have been redeemable at the issuer's option since September 3, 2007. The preferred shares, whose liquidation price is US $1,000 per share, are traded on the New York Stock Exchange in the form of depositary shares representing 1/40 of each share. Each preferred share will automatically be exchanged for a new First Preferred Share, Series Z of the Bank if one of the following events occurs: (i) the Bank defaults on the dividend payment for its first preferred shares; (ii) the Bank's Tier 1 capital ratio is less than 4% or its total capital ratio is less than 8%; or (iii) at the request of the Superintendent, in accordance with subsection 485(3) of the Bank Act (Canada).

12 - Capital Stock



Shares outstanding and dividends declared as at January31, 2008
-----------------------------------------------------------------------
Shares Dividends Dividends
Number of shares $ $ per share
-----------------------------------------------------------------------
First Preferred Shares
Series 15 8,000,000 200 3 0.3656
Series 16 8,000,000 200 2 0.3031
-----------------------------------------------------------------------
16,000,000 400 5 0.6687
-----------------------------------------------------------------------

Common Shares 158,141,407 1,590 98 0.6200
-----------------------------------------------------------------------
1,990 103
-----------------------------------------------------------------------
-----------------------------------------------------------------------


REPURCHASE OF COMMON SHARES

On January 28, 2008, the Bank announced that it had filed a normal course issuer bid for the repurchase and cancellation of up to 4,700,000 common shares over a 12-month period beginning on February 1, 2008 and ending no later than January 30, 2009. Repurchases will be made on the open market at market prices through the facilities of the Toronto Stock Exchange.

On February 1, 2007, the Bank had filed a normal course issuer bid for the repurchase and cancellation of up to 8,102,000 common shares over a 12-month period ending no later than January 31, 2008. On January 23, 2006, the Bank had filed a normal course issuer bid for the repurchase and cancellation of up to 8,278,000 common shares over a 12-month period ending no later than January 22, 2007. Repurchases were made on the open market at market prices through the facilities of the Toronto Stock Exchange. Premiums paid above the average book value of the common shares were charged to Retained earnings. During the quarter ended January 31, 2008, the Bank did not repurchase any common shares. During the quarter ended January 31, 2007, the Bank had repurchased 717,000 common shares at a cost of $46 million, which had reduced Common share capital by $7 million and Retained earnings by $39 million.

13 - Pension Benefits and Other Employee Future Benefits



-----------------------------------------------------------------------
Quarter ended January 31, October 31, January 31,
2008 2007 2007
-----------------------------------------------------------------------

Pension benefit expense 9 16 15
Other employee future benefit
expense 3 3 3
-----------------------------------------------------------------------
-----------------------------------------------------------------------


14 - Stock-Based Compensation

STOCK OPTION PLAN

During the quarter ended January 31, 2008, the Bank awarded 2,260,036 stock options (2007: 1,493,504) with a fair value of $9.21 per option (2007: $11.32).

As at January 31, 2008, a total of 7,571,221 stock options were outstanding.

The fair value of the options awarded was estimated on the award date using the Black-Scholes model. The following assumptions were used:



----------------------------------------------------------------------
Quarter ended January 31, January 31,
2008 2007
----------------------------------------------------------------------
Risk-free interest rate 4.40% 4.05%
Expected life of the options 6 years 5 years
Expected volatility 25.3% 22.5%
Expected dividend yield 4.6% 3.3%
----------------------------------------------------------------------
----------------------------------------------------------------------

----------------------------------------------------------------------
Quarter ended January 31, October 31, January 31,
2008 2007 2007
----------------------------------------------------------------------
Compensation expense recorded for
the stock options 2 2 5

----------------------------------------------------------------------
----------------------------------------------------------------------


15 - Collateral Management

PLEDGED ASSETS

In the normal course of business, the Bank pledges securities and other assets as collateral for various liabilities it contracts. A breakdown of assets pledged as collateral is provided in the following table. These transactions were concluded under standard terms and conditions for such transactions.



----------------------------------------------------------------------
January 31, October 31,
2008 2007
----------------------------------------------------------------------

Assets pledged in relation to
Derivative financial instrument transactions 434 948
Borrowing, securities lending and
securities sold under repurchase agreements 20,838 17,227
Direct clearing organizations and other 5,389 5,619
----------------------------------------------------------------------
Total 26,661 23,794
----------------------------------------------------------------------
----------------------------------------------------------------------


FINANCIAL ASSETS RECEIVED AS COLLATERAL

As at January 31, 2008, the fair value of financial assets received as collateral that the Bank was authorized to sell or repledge totalled $31 billion (October 31, 2007: $27 billion).

These financial assets received as collateral were obtained as a result of transactions involving securities purchased under reverse repurchase, borrowing and securities lending agreements and derivative financial instrument transactions.

These transactions were concluded in accordance with standard terms and conditions for such transactions.

16 - Litigation

In the normal course of business, the Bank is a party in legal proceedings, many of which are related to lending activities and arise when the Bank takes measures to collect delinquent loans. The Bank is also sometimes named as a defendant or joined in class action suites filed by consumers contesting, among other things, certain transaction fees and unilateral increases in their credit card limits or who wish to avail themselves of certain provisions of consumer protection legislation. The Bank's investment dealer subsidiary, National Bank Financial, is also a party in various legal proceedings in the normal course of business. Most of these proceedings concern Individual Investor Services and generally relate to the suitability of investments made by investors relying on the advice of their respective advisors. In the opinion of Management, based on available information and past experience, the related aggregate potential liability will not have a material unfavourable impact on the Bank's financial position.

As a result of the events that occurred in the asset-backed commercial paper (ABCP) market in August 2007, the Bank and its subsidiaries have received inquiries, complaints and formal demands from some of their clients, and are the subject of a lawsuit relating to the role of the Bank and its subsidiaries in ABCP-related transactions. On the basis of the arguments advanced by ABCP holders to date, Management is of the opinion that the Bank and its subsidiaries have strong defenses. At this stage, however, it is not possible to determine the outcome of such client requests, complaints, formal demands and legal action.

17 - Segment Disclosures



-----------------------------------------------------------------------
Personal Wealth Financial
and Commercial Management Markets
-----------------------------------------------------------------------

Quarter ended
January 31 2008 2007 2008 2007 2008 2007
-----------------------------------------------------------------------

Net interest
income(1) 342 344 34 33 150 (9)
Other income(1) 204 196 182 190 72 302
-----------------------------------------------------------------------
Total revenues 546 540 216 223 222 293
Operating expenses 309 312 153 156 173 168
-----------------------------------------------------------------------
Contribution 237 228 63 67 49 125
Provision for credit
losses 44 43 - - - -
-----------------------------------------------------------------------
Income (loss) before
income taxes
(recovery) and
non-controlling
interest 193 185 63 67 49 125
Income taxes
(recovery)(1) 63 62 20 21 40 41
Non-controlling
interest - - 2 2 (64) 1
-----------------------------------------------------------------------
Net income (loss) 130 123 41 44 73 83
-----------------------------------------------------------------------
Average assets 51,078 47,441 693 644 84,256 83,802
-----------------------------------------------------------------------
-----------------------------------------------------------------------


-----------------------------------------------------------------------
Other Total
-----------------------------------------------------------------------
Quarter ended January 31 2008 2007 2008 2007
-----------------------------------------------------------------------
Net interest income(1) (98) (92) 428 276

Other income(1) 43 25 501 713
-----------------------------------------------------------------------

Total revenues (55) (67) 929 989
Operating expenses (3) 20 632 656
-----------------------------------------------------------------------
Contribution (52) (87) 297 333
Provision for credit losses (12) (14) 32 29
-----------------------------------------------------------------------
Income (loss) before
income taxes (recovery) and
non-controlling interest (40) (73) 265 304
Income taxes (recovery)(1) (56) (68) 67 56
Non-controlling interest 5 5 (57) 8
-----------------------------------------------------------------------
Net income (loss) 11 (10) 255 240
-----------------------------------------------------------------------
Average assets (13,174) (12,041) 122,853 119,846
-----------------------------------------------------------------------
-----------------------------------------------------------------------


Personal and Commercial

The Personal and Commercial segment comprises the branch network, intermediary services, credit cards, insurance, business banking services and real estate.

Wealth Management

The Wealth Management segment comprises full-service retail brokerage, direct brokerage, mutual funds, trust services and portfolio management.

Financial Markets

The Financial Markets segment encompasses corporate financing and lending, treasury operations, including asset and liability management for the Bank, and corporate brokerage.

Other

This heading comprises securitization transactions, certain non-recurring elements, and the unallocated portion of centralized services.

Taxable Equivalent

(1) The accounting policies are the same as those presented in the note on accounting policies (Note 1), with the exception of the net interest income, other income and income taxes (recovery) of the operating segments, which are presented on a taxable equivalent basis. Taxable equivalent basis is a calculation method that consists in grossing up certain tax-exempt income by the amount of income tax that would have been otherwise payable. For all of the operating segments, net interest income was grossed up by $23 million (2007: $44 million) and other income by $25 million (2007: $21 million). An equivalent amount was added to income taxes (recovery). The impact of these adjustments is reversed under the Other heading.

18 - Disposal

On January 3, 2008, the Bank, through one of its wholly owned subsidiaries, finalized the sale of all of its common shares in National Bank of Canada (International) Ltd. to Credit Agricole (Suisse) SA. As a result of this transaction, the Bank recorded a gain of $32 million, net of related charges of $1 million, in the Consolidated Statement of Income. An additional gain of $6 million will be recognized in the Consolidated Statement of Income, provided a certain level of assets under management is maintained.



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 Gauchetiere West, 7th Floor
Montreal, Quebec H3B 4L2
Toll-free: 1-866-517-5455
Fax: 514-394-6196
E-mail: investorrelations@nbc.ca
Website: www.nbc.ca/investorrelations

Public Relations
600 de La Gauchetiere West, 10th Floor
Montreal, Quebec H3B 4L2
Telephone: 514-394-8644
Fax: 514-394-6258

Website: www.nbc.ca
General inquiries: telnat@nbc.ca

Quarterly Report Publication Dates for Fiscal 2008
Second quarter: May 29, 2008
Third quarter: August 28, 2008
Fourth quarter: November 27, 2008

Disclosure of First Quarter 2008 Results

Conference Call

- A conference call for analysts and institutional investors will be held
on February 28, 2008 at 1:00 p.m. ET.

- Access by telephone in listen-only mode: 1-866-542-4236 or 416-641-6127

- A recording of the conference call can be heard until March 6, 2008 by
calling 416-695-5800 or 1-800-408-3053. The access code is 3252080#.

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, Computershare Trust Company of Canada, at the
address or telephone number below.

Computershare Trust Company of Canada
Share Ownership Management
1500 University, 7th Floor
Montreal, Quebec H3A 3S8
Telephone: 1-888-838-1407
Fax: 1-888-453-0330
Email: service@computershare.com
Website: www.computershare.com

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, Computershare
Trust Company of Canada.

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, Computershare Trust
Company of Canada, at 1-888-838-1407.

Dividends

The dividends declared by the Bank constitute eligible dividends pursuant
to the Income Tax Act (Canada).

Contact Information

  • National Bank of Canada
    Patricia Curadeau-Grou
    Executive Vice-President
    Finance, Risk and Treasury
    514-394-6619
    or
    National Bank of Canada
    Jean Dagenais
    Senior Vice-President and
    Chief Financial Officer
    514-394-6233
    or
    National Bank of Canada
    Denis Dube
    Director
    Public Relations
    514-394-8644
    or
    National Bank of Canada
    Helene Baril
    Director
    Investor Relations
    514-394-0296