National Bank of Canada announces its results for the second quarter of 2002

Montreal, 30 May 2002 - 

• Net income of $122 million
• Allowances for credit losses exceed impaired loans by $92 million
• 5.6 million common shares repurchased.

National Bank of Canada declared income before goodwill charges of $122 million or 62 cents per share for the second quarter ended April 30, 2002, compared to $145 million or 71 cents per share for the corresponding quarter of 2001. Return on common shareholders' equity was 13.1% for the quarter as against 16.6% for the same quarter last year.

During the quarter, the National Bank increased its provision for credit losses by $100 million following a decision by BCE Inc. to cease providing financial support to its Teleglobe subsidiary. Moreover, the Bank reduced its general allowance for credit risk by $30 million and recorded $10 million in revenues generated by merchant banking investments. Taken together, these items reduced earnings for the quarter, net of income taxes, by $38 million or 20 cents per share.

Réal Raymond, President and Chief Executive Officer of the National Bank, noted that the steps taken by the Bank in the first quarter with respect to its impaired loan portfolio had given it manoeuvrability so that it was able to take action in the telecommunications sector. Mr. Raymond also singled out the excellent results posted by Financial Markets, Treasury and Investment Banking, and the satisfactory performance turned in by the other business units in the current economic environment.

Other strategic measures were also taken during the second quarter in order to further strengthen the Bank's position in certain target markets. For instance, the Bank announced that it had concluded a definitive agreement to acquire Putnam Lovell Group Inc., an American investment bank founded in 1987 with offices in New York, San Francisco, Los Angeles and London, all focusing exclusively on the financial services industry. The advisory services of Putnam Lovell and the Financial Institutions Group of National Bank Financial will be merged under the name Putnam Lovell NBF.

This transaction is consistent with National Bank Financial's strategic plan of developing capabilities in areas where NBF already has proven expertise in the domestic market, without increasing the National Bank's credit risk.

With respect to e-commerce, some 2.8 million visitors to the popular Sympatico-Lycos French Internet portal will now be able to obtain flexible Bank products and advisory services online thanks to a partnership agreement signed in February. The tools and content of the Bank's site will be integrated into the "mes finances" section of the Sympatico portal, thereby giving Internet users quick access to the Bank's financial products and advisory services at their convenience.

Quarterly financial statements are available at all times on the National Bank of Canada website at www.nbc.ca/investorrelations.

Conference call on second-quarter results

• A conference call for financial analysts will be held on May 30, 2002 at 1:00 p.m.
• Access by telephone: 1-800-387-6216 or (416) 405-9328.
• Investors and media representatives will be able to listen in on the conference call.
• The conference call will be webcast live at www.nbc.ca/investorrelations
• Supplementary financial information and a slide presentation will be available on the investor relations page of the National Bank's website shortly before the start of the conference call.

Recording of the conference call

• A recording of the conference call can be heard until June 6, 2002 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1161998.
• A recording of the webcast will also be available on the Internet after the call at www.nbc.ca/investorrelations.

MANAGEMENT'S ANALYSIS OF THE FINANCIAL CONDITION AND OPERATING RESULTS

The following text presents management's analysis of the Bank's financial condition and operating results as presented in the unaudited consolidated financial statements for the second quarter and the six months ended April 30, 2002.

Strategic Objectives

As indicated in the 2001 Annual Report, the National Bank set certain strategic objectives for itself for fiscal 2002 and subsequent years. The results obtained for the second quarter and the first six months of 2002 include the impact of the provision for credit losses recorded in the telecommunications sector:

Operating Results

For the second quarter ended April 30, 2002, the National Bank recorded income before goodwill charges of $122 million or 62 cents per share compared to $145 million or 71 cents per share for the corresponding quarter of 2001. Return on common shareholders' equity before goodwill charges was 13.1% as against 16.6% for the second quarter of 2001.

For the first six months of 2002, income before goodwill charges was $268 million or $1.35 per share versus $287 million or $1.42 per share for the same period in 2001. Return on common shareholders' equity before goodwill charges was 14.1% for the first half of 2002 compared to 16.3% for the same period in 2001.

Results by Segment

Earnings for Personal Banking and Wealth Management amounted to $56 million for the second quarter of 2002 compared to $65 million for the corresponding period of 2001. Net interest income for the quarter remained stable at $241 million. The narrower spreads on transaction accounts, attributable to lower interest rates, was offset by wider spreads on credit card loans. Other income for the quarter amounted to $235 million, down from $243 million for the second quarter of 2001 primarily because of a decline in retail brokerage activity. At $362 million, operating expenses for the quarter rose less than 1% from the $360 million recorded in the same quarter of 2001. The provision for credit losses totalled $25 million versus $21 million for the second quarter of 2001.

Earnings for Personal Banking and Wealth Management for the first six months of fiscal 2002 amounted to $124 million compared to $129 million for the same period in 2001.

With regard to Commercial Banking, earnings for the second quarter totalled $28 million as against $29 million for the same period in 2001. Net interest income was $70 million for the quarter, down from $72 million for the corresponding period of 2001 owing to weaker demand for credit in many industrial sectors, despite a stable spread of 2.54%. Operating expenses for the quarter amounted to $39 million versus $37 million for the second quarter of 2001. The provision for credit losses in the second quarter totalled $21 million compared to $22 million for the same period in 2001.

For the first six months of 2002, Commercial Banking earnings amounted to $59 million as against $65 million for the same period in 2001. Two-thirds of the decrease in earnings was attributable to the provision for expected credit losses.

For Financial Markets, Treasury and Investment Banking, second-quarter earnings reached $79 million, up $26 million from the corresponding period a year earlier, representing an increase of almost 50%. Total revenues rose $54 million to $238 million, for a 29% increase. One-third of this rise was attributable to net interest income, primarily because of asset and liability management operations, which offset the narrower spread on transaction deposit accounts in Personal Banking. Institutional operations at National Bank Financial, which included gross earnings of $14 million from merchant banking investments, accounted for the remaining improvement in earnings. Operating expenses amounted to $103 million for the quarter, up 12% from $92 million for the second quarter a year earlier largely owing to variable remuneration. The provision for credit losses stood at $10 million versus $4 million for the corresponding year-earlier period owing to changes in the credit risk rating of accounts with large corporations.

Earnings for Financial Markets, Treasury and Investment Banking since the start of the fiscal year amounted to $143 million, up 47% from the $97 million recorded for the same period in 2001.

Revenues

Revenues for the second quarter of 2002, on a taxable equivalent basis, totalled $827 million as against $798 million for the corresponding period of 2001, for an increase of 4%.

Net interest income, on a taxable equivalent basis, was up 3% to $361 million from $352 million in the second quarter of 2001. Asset and liability management operations chiefly accounted for this rise.

At $466 million, other income, on a taxable equivalent basis, increased 4% over the $446 million recorded in the second quarter of 2001, primarily owing to institutional operations at National Bank Financial.

Operating Expenses

For the second quarter of 2002, operating expenses were $491 million, down from $503 million for the corresponding period of 2001. The efficiency ratio improved from 63.1% for the quarter ended April 30, 2001 to 59.4% this quarter (60% excluding revenues from merchant banking investments), notably because a larger proportion of revenues was generated by Financial Markets, Treasury and Investment Banking.

Provision for Credit Losses and Impaired Loans

The provision for credit losses for the quarter totalled $130 million as against $46 million for the corresponding quarter of 2001. An amount of $100 million was recorded as a provision for credit losses in the telecommunications sector. In addition, the general allowance for credit risk was reduced by $30 million in accordance with the methodology used for creating this allowance.

As at April 30, 2002, allowances for credit losses exceeded impaired loans by $92 million compared to $128 million as at January 31, 2002. At the end of fiscal 2001, net impaired loans stood at $91 million. The increase in net impaired loans was attributable to loans to Teleglobe.

The ratio of gross impaired loans to total tangible capital and allowances remained excellent at 15.9% as at April 30, 2002 compared to 13.6% as at January 31, 2002 and 22.4% as at October 31, 2001.

Assets

The Bank had total assets of $74.7 billion as at April 30, 2002 versus $75.8 billion at the end of fiscal 2001. Loans and acceptances fell $4.4 billion, of which approximately $3 billion was attributable to the sale of U.S. asset-based lending operations. Cash resources, securities and securities purchased under reverse repurchase agreements rose by $3.9 billion.

Savings

Total personal savings administered by the Bank amounted to $64.9 billion as at April 30, 2002, up from $60.8 billion as at October 31, 2001. Savings administered by National Bank Financial accounted for the $4.1 billion increase.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 10.7% and 14.5% respectively as at April 30, 2002, versus 11.1% and 15.0% as at January 31, 2002 and 9.6% and 13.1% as at October 31, 2001. In comparison to the previous quarter, the ratios declined primarily because of the repurchase of 5.6 million common shares under the normal course issuer bid. In addition, on February 15, 2002, the Bank redeemed non-cumulative first preferred shares, Series 11, totalling $100 million.

The improvement in the ratios since October 31, 2001 was due to the reduction in risk-weighted assets, particularly following the sale of U.S. commercial lending operations.

Dividends

At its meeting on May 30, 2002, the Board of Directors declared regular dividends on the various classes and series of preferred shares as well as a dividend of 24 cents per common share, payable on August 1, 2002 to shareholders of record on June 27, 2002.

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