National Bank Financial Group
TSX : NA

National Bank Financial Group

May 26, 2011 07:45 ET

National Bank Releases its Results for the Second Quarter of 2011 and Raises its Dividend

MONTREAL, QUEBEC--(Marketwire - May 26, 2011) -National Bank Financial Group (TSX:NA) - The financial information in this press release is based on the unaudited interim consolidated financial statements for the second quarter ended April 30, 2011. Additional information about National Bank of Canada, including the Annual Information Form, can be obtained from the SEDAR website at www.sedar.com or on Bank's website at www.nbc.ca.

Highlights:

  • Net income of $295 million in the second quarter of 2011, up 13% from $261 million in the same quarter of 2010;
  • Excluding specified items(1), diluted earnings per share of $1.69 in the second quarter of 2011, up 13% from $1.50 in the same quarter of 2010;
  • Return on equity of 15.9%;
  • Series 21, 24 and 26 First Preferred Shares repurchased for $361 million, including a premium of $34 million;
  • Core Tier 1 capital ratio under Basel III of 8.2% as at April 30, 2011;
  • At 71 cents per share, the quarterly dividend increased by 5 cents per share or 8%.
(1)The financial reporting method is explained in detail on page 5.

National Bank reports net income of $295 million in the second quarter of fiscal 2011, up 13% from $261 million in the second quarter of 2010. Diluted earnings per share for the quarter ended April 30, 2011 stood at $1.48 compared to $1.50 in the same quarter of 2010.

While no specified items had affected net income in the second quarters of 2010 and 2011, the diluted earnings per share for the second quarter of 2011 must reflect a premium of $34 million, or 21 cents per share, paid on the preferred shares repurchased for cancellation. Excluding this specified item, the $1.69 in diluted earnings per common share for the second quarter of 2011 was up 13% from $1.50 in the same quarter of 2010.

For the first six months of fiscal 2011, the Bank's net income totalled $607 million, up 28% from $476 million in the same period of 2010. Diluted earnings per share stood at $3.28 for the first six months of 2011, up $0.56 or 21% from $2.72 in the same period of 2010. Excluding the specified items described on page 5, the $607 million in first-half net income was up 15% from $529 million in the same period of 2010, and diluted earnings per share would have been $3.49 for the first six months of 2011, up 14% from $3.05 in the same period of 2010.

"Each of the three business segments posted an increase in net income of over 10% in the second quarter of 2011. Personal and commercial loan volumes grew steadily and the quality of the credit portfolio remained solid. The Wealth Management segment increased its assets under management and administration and its commission revenues. And the Financial Markets segment also performed well, especially with regard to new government and corporate issuances. National Bank, which was recently recognized as one of the world's strongest banks, continues to be well positioned to expand its activities while paying excellent dividends to shareholders," said President and Chief Executive Officer, Louis Vachon.

Financial IndicatorsResultsResults
excludingResultsexcluding
ResultsspecifiedFirst halfspecified
Q2 2011items(1)2011items(1)
Growth in diluted earnings per share(1)%13%21%14%
Return on common shareholders' equity15.9%18.1%17.5%18.6%
Tier 1 capital ratio under Basel II14.1%14.1%14.1%14.1%
Core Tier 1 capital ratio under Basel III8.2%8.2%8.2%8.2%
Dividend payout ratio39%38%39%38%
(1) See "Financial Reporting Method" on page 5.

Results by Segment

Personal and Commercial

In the Personal and Commercial segment, net income rose 10% to total $149 million for the quarter. Total revenues amounted to $618 million, a $24 million increase that was mainly due to higher net interest income, which, at $382 million, rose $16 million as a result of growth in personal and commercial loan volumes and a wider spread on deposits. This growth was tempered by a narrowing of the net interest margin, which was 2.38% in the second quarter of 2011 compared to 2.48% in the same quarter of 2010, mainly due to smaller spreads on personal and commercial loans.

Personal Banking's total revenues amounted to $412 million, a $13 million increase that was mainly due to higher loan volumes, especially consumer and mortgage loans, partly offset by a narrowing of net interest margins. At $156 million, other income grew $5 million from the same period of 2010, essentially due to insurance revenues and commissions on referrals for wealth management products.

Commercial Banking's total revenues amounted to $206 million, an $11 million increase owing mainly to higher loan and deposit volumes. However, the narrower spread on credit products was partly mitigated by the improved spread on deposits.

Operating expenses for the Personal and Commercial segment stood at $353 million in the second quarter of 2011, up $9 million from the same quarter of 2010. Despite this increase, the efficiency ratio improved to 57% for the quarter from 58% for the same quarter last year. At $55 million, the segment's provision for credit losses remained stable, with the lower provision for personal and credit card loan losses offsetting the higher provision for commercial credit losses.

For the first six months of 2011, the Personal and Commercial segment posted net income of $306 million, up $34 million from $272 million in the same period of 2010. First-half total revenues for the segment rose 5% to total $1,251 million. Personal Banking's total revenues were up $31 million or 4%, mainly due to higher consumer and mortgage loan volumes and to a widening spread on deposits, and Commercial Banking's total revenues rose $29 million or 7%. At $110 million, the segment's provision for credit losses was relatively stable when compared to the same six-month period of 2010. The efficiency ratio for the first six months of 2011 improved to 57% from 58% in the same period of 2010.

Wealth Management

In the Wealth Management segment, net income totalled $43 million in the second quarter of 2011, up $14 million or 48% from $29 million in the same quarter of 2010. Second quarter total revenues amounted to $222 million compared to $196 million in the second quarter of 2010, an increase that owes mainly to other income, which was up $19 million or 11%. This increase stems from a greater volume of assets under management and administration, which generated revenue growth from trust services and mutual funds. In addition, commission revenues increased on the strength of greater brokerage activity. Second quarter operating expenses increased $8 million year-over-year to stand at $161 million. The increase in salaries and variable compensation is explained by the growth in brokerage revenues. Despite the higher operating expense, the efficiency ratio improved to 73% this quarter from 78% in the same quarter of 2010.

For the first six months of fiscal 2011, the Wealth Management segment posted net income of $87 million compared to $52 million in the same period of 2010. First-half total revenues amounted to $440 million versus $389 million for the same period of 2010. Other income grew by $37 million or 11% due to higher revenues from trust services, mutual funds, and securities brokerage commissions. First-half operating expenses stood at $317 million compared to $308 million in the same period of 2010. This 3% increase in expenses, combined with the 13% growth in revenues, improved the efficiency ratio to 72% for this six-month period from 79% in the same six-month period of 2010.

Financial Markets

In the Financial Markets segment, net income totalled $146 million in the second quarter of 2011, up $26 million from $120 million in the same quarter of 2010. Second quarter total revenues amounted to $376 million compared to $337 million in the second quarter of 2010. On a taxable-equivalent basis and including non-controlling interests related to trading activities, the second quarter revenues were $380 million compared to $332 million in the same quarter of 2010. Trading activity revenues on a taxable equivalent basis were $133 million for the quarter, down $15 million from the same year-earlier quarter, mainly due to lower revenues from equity securities. Revenues from most other activities were up compared to the same quarter of 2010. The 27% growth in financial market fees came from greater capital issuance activity. Banking service revenues increased by 12%, and the other Financial Market revenues benefited from the revenue growth experienced by treasury operations and the Credigy Ltd. subsidiary.

The segment's second quarter operating expenses stood at $182 million, a year-over-year increase of $22 million that was partly due to higher variable compensation and to the higher costs inherent to the greater business activity at subsidiary Credigy Ltd. For the second quarter of 2011, the segment's provision for credit losses was a $5 million recovery, which is $4 million more than the recovery in the same quarter of 2010.

For the first six months of fiscal 2011, net income for the segment totalled $283 million, up $19 million or 7% from the same period in 2010. Total revenues amounted to $760 million compared to $692 million for the first six months of 2010. On a taxable equivalent basis and including non-controlling interests related to trading activities, first-half revenues totalled $755 million, up $63 million or 9% from the first six months of fiscal 2010. All types of revenues increased, benefiting from the rebound in activity, except for trading revenues and gains on available-for-sale securities. The segment's first-half operating expenses were $360 million, a $51 million increase from the same period in 2010. For the first half of fiscal 2011, the segment's provision for credit losses was a $5 million recovery, a $9 million favourable change compared to the same period of 2010.

Other

The Other heading of segment results showed a second quarter net loss of $43 million versus a net loss of $24 million in the second quarter of 2010. Total revenues were up by $5 million from the second quarter of 2010 due to higher securitization revenues in the second quarter of 2011, tempered by gains on the sale of equity securities that had been recorded in the second quarter of 2010. Second quarter operating expenses were up $23 million, primarily because additional provisions for taxes on capital and compensation tax were recognized, whereas a recovery had been recognized for the same quarter of 2010.

For the first six months of 2011, the net loss under this heading was $69 million compared to a net loss of $112 million in the same period of 2010. The difference stems mainly from the recognition of a $75 million administrative penalty, partly offset by a $25 million reversal of a provision for income tax contingencies, that had been recorded in the first quarter of 2010.

Capital

The Bank uses the Advanced Internal Rating-Based Approach for credit risk. For operational risk, the Bank uses the Standardized Approach and, for market risk, it continues to use the models and the Standardized Approach in accordance with the Basel II Accord. Detailed information is provided in the "Capital Management" section on pages 58 to 60 of the 2010 Annual Report. The new Basel III capital standards will gradually come into force from January 1, 2013 to January 1, 2019. The Bank expects that it will be able to achieve compliance with these new standards without resorting to the regulatory event redemption clause included in the capital instruments in question. As at April 30, 2011, the Core Tier 1 capital ratio stood at 8.2%.

According to the rules of the Bank for International Settlements (BIS) – Basel II, the Tier 1 capital ratio and the total capital ratio stood at 14.1% and 17.5%, respectively, as at April 30, 2011; as at October 31, 2010, these same ratios were 14.0% and 17.5%, respectively. The capital ratios remained relatively stable, mainly due to the growth in retained earnings tempered by the repurchase of preferred shares for cancellation.

The risk-weighted assets calculated under the rules of Basel II decreased and amounted to $49.1 billion as at April 30, 2011 compared to $49.8 billion as at October 31, 2010.

Subsequent Event

On May 25, 2011, the Bank entered into an agreement to acquire all of the shares it does not own (82%) of Wellington West Holdings Inc., the holding company for various businesses which operate in the wealth management and capital markets segments, for a consideration of approximately $273 million. The final purchase price is subject to various adjustments to be determined at closing and following the closing. This consideration will consist of common shares of the Bank and an amount payable in cash. The closing of the transaction, anticipated for July 2011, remains subject to the approval of the shareholders of Wellington West Holdings Inc., certain other conditions, and approvals from the Manitoba court and regulatory agencies.

HIGHLIGHTS

(unaudited) (millions of dollars)
Quarter endedSix months ended
April 30, 2011April 30,
2010
% ChangeApril 30,
2011
April 30,
2010
% Change
Operating results
Total revenues$1,146$1,0529$2,299$2,1298
Total revenues adjusted for non-controlling interests(1)1,1501,047102,2942,1298
Net income2952611360747628
Return on common shareholders' equity15.9%18.0%17.5%16.1%
Per common share (dollars)
Earnings – Basic$1.50$1.51(1)$3.31$2.7421
Earnings – Diluted1.481.50(1)3.282.7221
EXCLUDING SPECIFIED ITEMS(2)
Operating results
Total revenues$1,146$1,0529$2,299$2,1348
Total revenues adjusted for non-controlling interests(1)1,1501,047102,2942,1347
Net income2952611360752915
Return on common shareholders' equity18.1%17.8%18.6%17.9%
Per common share (dollars)
Earnings – Basic$1.71$1.5213$3.53$3.0815
Earnings – Diluted1.691.50133.493.0514
Per common share (dollars)
Dividends declared$0.66$0.62$1.32$1.24
Book value38.8534.48
Stock trading range
High80.5664.0180.5664.62
Low69.9956.6264.8656.51
Close78.3462.1078.3462.10
As at
April 30,
2011
As at
October 31,
2010
% Change
Financial position
Total assets$154,944$145,3017
Loans and acceptances(3)66,30563,1345
Deposits87,38281,7857
Subordinated debentures and shareholders' equity9,0589,241(2)
Core Tier 1 capital ratio under Basel III8.2%7.6%
Capital ratios – BIS under Basel II
Tier 114.1%14.0%
Total17.5%17.5%
Capital ratios – BIS under Basel I
Tier 111.7%12.1%
Total15.0%15.6%
Impaired loans, net of specific and general allowances(212)(267)
As a% of loans and acceptances(0.3)%(0.4)%
Assets under administration/management246,170235,541
Total personal savings125,585118,098
Interest coverage10.049.03
Asset coverage4.374.48
Other information
Number of employees18,49218,3221
Number of branches in Canada441442-
Number of banking machines867869-
(1)Adjusted for gains or losses mainly attributable to third parties.
(2)See "Financial Reporting Method" on page 5.
(3)Net of securitized assets.

FINANCIAL REPORTING METHOD

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

Financial Information
(unaudited) (millions of dollars)
Quarter endedSix months ended



April 30, 2011
April 30,
2010

% ChangeApril 30,
2011

April 30,
2010

% Change
Excluding specified items
Personal and Commercial1491361030627213
Wealth Management432948875267
Financial Markets146120222832647
Other(43)(24)(69)(59)
Net income excluding specified items2952611360752915
Less: Holding charges for restructured notes of the MAV conduits(1)---(3)
Less: Administrative penalty(2)---(75)
Plus: Reversal of a provision for income tax contingencies(3)---25
Net income2952611360747628
Diluted earnings per common share excluding specified items$1.69$1.5013$3.49$3.0514
Less: Premium paid on preferred shares repurchased for cancellation(4)(0.21)-(0.21)-
Less: Holding charges for restructured notes of the MAV conduits(1)---(0.02)
Less: Administrative penalty(2)---(0.46)
Plus: Reversal of a provision for income tax contingencies(3)---0.15
Diluted earnings per common share$1.48$1.50(1)$3.28$2.7221
Return on common shareholders' equity
Including specified items15.9%18.0%17.5%16.1%
Excluding specified items18.1%17.8%18.6%17.9%
(1)During the quarter ended April 30, 2011, the holding charges for restructured notes of the master asset vehicle (MAV) conduits were negligible (negligible in 2010). During the six months ended April 30, 2011, the holding charges for restructured notes of the MAV conduits were negligible ($3 million in 2010), net of income taxes.
(2)During the six months ended April 30, 2010, a $75 million administrative penalty had been recognized as part of a settlement of an agreement affecting the entire asset-backed commercial paper industry.
(3)During the six months ended April 30, 2010, a $25 million income tax provision had been reversed following a revaluation of income tax contingencies.
(4)During the quarter ended April 30, 2011, a $34 million premium was paid on the Series 21, 24 and 26 First Preferred Shares repurchased for cancellation.

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" section and under the "Medium-Term Objectives" heading in the "Outlook for National Bank" section of the 2010 Annual Report, in other filings with Canadian securities regulators and in other communications, for the purpose of describing the economic environment in which the Bank will operate during fiscal 2011 and the objectives it has set for itself for that period. These forward-looking statements are made pursuant to the "safe harbour" provisions of Canadian and U.S. securities legislation. They include, among others, statements with respect to the economy—particularly the Canadian and U.S. economies—market changes, observations regarding the Bank's objectives and its strategies for achieving them, Bank projected financial returns and certain risks faced by the Bank. These forward-looking statements are typically identified by future or conditional verbs or words such as "outlook," "believe," "anticipate," "estimate," "project," "expect," "intend," "plan," and terms and expressions of similar import.

By their very nature, such forward-looking statements require assumptions to be made and involve inherent risks and uncertainties, both general and specific. Assumptions about the performance of the Canadian and U.S. economies in 2011 and how that will affect the Bank's business are among the main factors considered in setting the Bank's strategic priorities and objectives and in determining its financial targets, including provisions for credit losses. In determining its expectations for economic growth, both broadly and in the financial services sector in particular, the Bank primarily considers historical economic data provided by the Canadian and U.S. governments and their agencies. Tax laws in the countries in which the Bank operates, primarily Canada and the United States, are major factors it considers when establishing its effective tax rate. There is a strong possibility that express or implied projections contained in such statements will not materialize or will not be accurate. The Bank recommends that readers not place undue reliance on these statements, as a number of factors, many of which are beyond the Bank's control, could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed in the forward-looking statements.

These factors include the management of credit, market and liquidity risks; the strength of the Canadian and U.S. economies and the economies of other countries in which the Bank conducts business; the impact of the movement of the Canadian dollar relative to other currencies, particularly the U.S. dollar; the effects of changes in monetary policy, including changes in interest rate policies of the Bank of Canada and the U.S. Federal Reserve; the effects of competition in the markets in which the Bank operates; the impact of changes in the laws and regulations regulating financial services and enforcement thereof (including banking, insurance and securities); judicial proceedings, regulatory proceedings or claims, class actions or other recourses of various nature; the situation with respect to the restructured notes of the master asset vehicles, in particular the realizable value of the underlying assets; the Bank's ability to obtain accurate and complete information from or on behalf of its clients or counterparties; the Bank's ability to successfully realign its organization, resources and processes; its ability to complete strategic acquisitions and integrate them successfully; changes in the accounting policies and methods the Bank uses to report its financial condition, including uncertainties associated with critical accounting assumptions and estimates; the Bank's ability to recruit and retain key officers; operational risks, including risks related to the Bank's reliance on third parties to ensure access to the infrastructure essential to the Bank's business as well as other factors that may affect future results, including changes in trade policies; timely development of new products and services; changes in estimates relating to reserves; changes in tax laws; technological changes; unexpected changes in consumer spending and saving habits; natural disasters; the possible impact on the business from public health emergencies, conflicts, other international events and developments, including those relating to the war on terrorism; and the Bank's success in anticipating and managing the foregoing risks.

A substantial amount of the Bank's business involves making loans or otherwise committing resources to specific companies, industries or countries. Unforeseen events affecting such borrowers, industries or countries could have a material adverse effect on the Bank's financial results, businesses, financial condition, or liquidity.

The foregoing list of risk factors is not exhaustive. Additional information about these factors can be found under "Risk Management" and "Factors That Could Affect Future Results" in the 2010 Annual Report. Investors and others who base themselves on the Bank's forward-looking statements should carefully consider the above factors as well as the uncertainties they represent and the risk they entail. The Bank also cautions readers not to place undue reliance on these forward-looking statements. Except as required by law, the Bank does not undertake to update any forward-looking statements, whether written or oral, that may be made from time to time, by it or on its behalf.

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

DISCLOSURE OF SECOND QUARTER 2011 RESULTS

Conference Call

  • A conference call for analysts and institutional investors will be held on May 26, 2011 at 1:00 p.m. EDT.
  • Access by telephone in listen-only mode: 1-866-226-1792 or 416-340-2216.
  • A recording of the conference call can be heard until June 4, 2011 by dialing 1-800-408-3053 or 905-694-9451. The access code is 4068080#.

Webcast

  • The conference call will be webcast live at www.nbc.ca/investorrelations.
  • A recording of the webcast will also be available on the Internet after the call.

Financial Documents

  • The quarterly financial statements are available at all times on National Bank's website at www.nbc.ca/investorrelations.
  • The Report to Shareholders, Supplementary Financial Information and a slide presentation will be available on the Investor Relations page of National Bank's website shortly before the start of the conference call.

Contact Information

  • National Bank Financial Group
    Patricia Curadeau-Grou
    Chief Financial Officer and Executive Vice-President
    Finance, Risk and Treasury
    514-394-6619

    National Bank Financial Group
    Jean Dagenais
    Senior Vice-President
    Finance, Taxation and Investor Relations
    514-394-6233

    National Bank Financial Group
    Claude Breton
    Senior Director
    Public Relations
    514-394-8644

    National Bank Financial Group
    Helene Baril
    Senior Director
    Investor Relations
    514-394-0296