National Bank announces 18% increase in earnings per share for second quarter 2003

• Net income up 13% to $138 million
• 14% growth in net income for Personal and Commercial 
• Credit quality remains excellent
• Quarterly dividend increased by 7.7%

National Bank of Canada declared net income of $138 million for the second quarter ended April 30, 2003, for an increase of 13% compared to $122 million for the corresponding period of 2002. Earnings per share were $0.73 for the quarter versus $0.62 for the second quarter of 2002, up 18%. Return on common shareholders' equity was 14.8% for the second quarter of 2003 compared to 13.1% for the corresponding period in 2002.

Strong growth in net income for the quarter versus the same quarter of 2002 was chiefly attributable to the reduction in the provision for credit losses. In addition, Personal and Commercial recorded net income of $72 million, for an increase of 14%. Wealth Management posted net income of $17 million for the quarter, unchanged from the corresponding quarter of 2002, while net income for Financial Markets was down $41 million to $37 million.

Commenting on these results, Réal Raymond, President and Chief Executive Officer, underscored the Bank's consistently strong performance. "Despite difficult economic conditions in the second quarter marked by volatile financial markets, the National Bank continues to perform well and to pursue its profitability objectives."

Mr. Raymond singled out, in particular, the solid performance of the Personal and Commercial segment and the steady results obtained by Wealth Management despite weak trading on the part of investors.

"We remain committed to fostering greater synergy between the various asset management platforms and distribution networks. The Bank is also stepping up its efforts to improve efficiency and to manage its operating expenses more effectively," Mr. Raymond added.

Moreover, the Board of Directors approved a 7.7% increase in the quarterly dividend, raising it from 26 cents to 28 cents per share.

For the six-month period ended April 30, 2003, net income was $304 million, for an increase of $36 million or 13%. Earnings per share rose 19% to $1.61 for the first half of 2003 as against $1.35 for the same period a year earlier. The decline in the provision for credit losses was again the main reason for the increase in net income for the first half of the year.

As at April 30, 2003, specific and general allowances exceeded gross impaired loans by $179 million compared to $159 million as at October 31, 2002, and $92 million a year earlier.

By the end of the quarter, the Bank had repurchased 82% or 7.5 million common shares out of a total 9.1 million under its normal course issuer bid.

Business Development

During the second quarter, the Bank continued to deploy its strategy aimed at further improving customer service. Last year, the Bank took steps to make its services more accessible by extending business hours at 60 of its branches in Quebec and introduced an extensive training plan to further develop the competencies of its front-line personnel. The Bank recently consolidated its efforts in this regard with the introduction of a brand new program intended to help employees in both the Personal and Commercial and Wealth Management segments foster closer ties with their customers. The various measures introduced this past year are yielding favourable results as evidenced by the latest round of surveys which show a steady improvement in customer satisfaction.

Quality customer service also means offering innovative products and services tailored to meet customers' specific needs. The Bank continued to stand out in this regard during the quarter by introducing several highly competitive mortgage offers geared to meeting the expectations of different types of homebuyers. In a similar vein, the Bank also scored an industry first with the recent launch of its Personalized Financing Guide, which makes it easy to identify the borrower profile of its customers and, based on this information, to offer them the financing solutions best suited to their needs.

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

Conference call on results for the second quarter of fiscal 2003

• A conference call for financial analysts will be held on May 29, 2003 at 2:30 p.m. Eastern time.
• Access by telephone: 1-800-273-9672 or (416) 695-5806.
• The conference call will be webcast live 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 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 5, 2003 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1415955.
• A recording of the webcast will also be available on the Internet after the call at www.nbc.ca/investorrelations.

  Management's analysis of 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 first half of 2003.

Strategic Objectives

The National Bank published its strategic objectives for fiscal 2003 in its 2002 Annual Report. The table below compares these objectives with the results for the second quarter and first half of 2003.

Analysis of Results

Operating Results

For the second quarter ended April 30, 2003, the National Bank earned net income of $138 million, for an increase of 13%, compared to $122 million for the second quarter of 2002. Earnings per share were $0.73 for the quarter versus $0.62 for the corresponding period of 2002, up 18%. Return on common shareholders' equity rose to 14.8% for the second quarter of 2003 as against 13.1% for the quarter ended April 30, 2002.

For the six-month period ended April 30, 2003, the National Bank recorded net income of $304 million compared to $268 million for the same period of 2002, representing an increase of 13%. At $1.61 for the first six months of 2003, earnings per share were up 19% versus $1.35 for the corresponding period of 2002. Return on common shareholders' equity rose to 16.3% for the first half of 2003 versus 14.1% for the six-month period ended April 30, 2002.

 Revenues

Total revenues for the second quarter of 2003 were $773 million, a decrease of $41 million from the $814 million recorded for the corresponding period of 2002.

Net interest income amounted to $343 million for the second quarter of 2003, down $13 million from $356 million for the corresponding period a year earlier. Net interest income for Personal and Commercial rose by $11 million or 4% to reach $300 million, mainly due to an increase of close to $1 billion in deposits from small and medium-sized enterprises. This increase was more than offset by the approximately $10 million reduction in net interest income resulting from asset and liability matching and the cost of financing the acquisition of Altamira. Other income for the quarter totalled $430 million as against $458 million for the second quarter of 2002, for a decline of $28 million. Capital market fees were down $30 million owing to reduced trading by individuals. Gains on investment account securities and income from trading activities were down $15 million in relation to the second quarter of 2002, when the Bank recorded $14 million in revenues generated by merchant banking investments. Moreover, income from trust services and mutual funds rose $17 million owing mainly to income from Altamira.

For the first six months of 2003, total revenues amounted to $1,608 million, for an increase of $32 million over the same period of 2002. The acquisition of Putnam Lovell and of Altamira generated $60 million. The gain on the initial public offering of the Toronto Stock Exchange contributed $26 million. However, net interest income was down $39 million chiefly due to lower income from asset and liability matching.

Operating Expenses

Operating expenses for the second quarter of 2003 amounted to $529 million, up $38 million from $491 million for the corresponding period of 2002. The acquisition of Putnam Lovell and Altamira added $31 million to operating expenses compared to the same quarter of 2002.

For the six-month period ended April 30, 2003, operating expenses amounted to $1,077 million, for an increase of $85 million, including $65 million attributable to acquisitions. If the impact of the acquisitions is excluded, the increase in operating expenses was 2% compared to the first six months of 2002.

Results by Segment

The revenues of each segment are presented on a taxable equivalent basis, i.e., they are grossed up to make the income earned on certain securities comparable with income from other financial instruments. An equivalent amount was added to income taxes. In addition, the provision for credit losses of each operating segment is based on expected losses which are calculated using statistical analyses. The difference between expected losses and actual losses is charged to the "Other" heading.

Personal and Commercial

Personal and Commercial posted net income of $72 million for the second quarter of 2003, up 14% from $63 million for the corresponding period of 2002. Revenues were $447 million, for an increase of $16 million or 4%. Net interest income, which totalled $300 million, rose $11 million owing mainly to the increase of close to $1 billion in the volume of deposits from small and medium-size enterprises. Other income was up by $5 million to $147 million primarily attributable to commercial lending fees and revenues from credit card and insurance activities. Operating expenses for the quarter were $282 million compared to $273 million for the second quarter of 2002. The efficiency ratio was 63.1% versus 63.3% for the same period a year earlier. Lastly, expected loan losses declined by $4 million or 7% from the corresponding period in 2002, reflecting the good quality of the loan portfolio.

For the first six months of 2003, net income for Personal and Commercial rose 23%, from $132 million for the first six months of 2002 to $163 million. Revenues were $915 million, for an increase of $44 million or 5%. Nearly 50% of the increase was attributable to Personal Banking while the other 50% was due to credit card and insurance activities. Operating expenses were $555 million, up 1.5% compared to the first six months of 2002. The efficiency ratio improved, going from 62.8% in the first six months of 2002 to 60.7% in the first six months of this year.

Wealth Management

Net income for the Wealth Management segment totalled $17 million for the second quarter of 2003, unchanged from the corresponding quarter a year earlier. Revenues amounted to $154 million this quarter versus $157 million for the same period in 2002. Lower retail brokerage revenues were offset in part by the addition of $14 million in revenues from Altamira. At $126 million, operating expenses were down $5 million, primarily because of variable expenses related to the decline in brokerage revenues, which were offset in part by Altamira expenses.

For the six-month period ended April 30, 2003, net income for Wealth Management amounted to $36 million as against $40 million for the same period a year earlier. The decline in activity by individuals on capital markets accounted for most of the decrease.

Financial Markets

For the second quarter of 2003, Financial Markets posted net income of $37 million, down $41 million. Revenues for the quarter reached $187 million, for a decrease of $43 million or 19%. A gain generated by merchant banking investments in the second quarter of 2002 accounted for $14 million of this variance. The use of market value to record credit derivatives reduced the segment's revenues by $18 million. The remainder was attributable to lower corporate financing volumes. At $117 million, operating expenses rose $17 million mainly as a result of the addition of Putnam Lovell expenses. Expected loan losses were $12 million for the second quarter of 2003 compared to $8 million for the same period in 2002.

For the first six months of 2003, net income for Financial Markets was $101 million, down $34 million from the same period a year earlier. Revenues were $424 million for the six-month period compared to $427 million for the first half of 2002. The addition of Putnam Lovell revenues was offset by the decline in corporate financing revenues. Operating expenses were $245 million for this six-month period versus $193 million for the same period a year earlier. Most of the increase was attributable to Putnam Lovell operating expenses. The provision for credit losses for the six months was $22 million as against $21 million for the same period in 2002.

Other

Net income for the "Other" heading totalled $12 million for the second quarter of 2003 compared to a loss of $36 million for the same period in 2002. The lower provision for credit losses was chiefly responsible for this improvement. The provision for credit losses for the "Other" heading includes the difference between expected losses charged to operating segments and actual loan losses incurred. The favourable $89 million variance compared to the second quarter of 2002 was primarily attributable to the $100 million loss for the telecommunications sector and the $30 million reduction in the general allowance for credit risk.

For the first six months of 2003, net income for the "Other" heading was $4 million as against a loss of $39 million for the corresponding period of 2002. The favourable $285 million variance for the provision for credit losses was primarily due to the revision of the estimated allowance of $185 million in the first quarter of 2002, the $100 million loss for the telecommunications sector and the $30 million reduction in the general allowance for credit risk. The "Discontinued Operations" heading includes the $118 million net gain generated by the sale of U.S. asset-based lending operations in the first quarter of 2002.

Risk Management

 Credit Risk

The provision for credit losses for the quarter was $41 million as against $130 million for the corresponding quarter of 2002. For the first six months of fiscal 2003, credit losses were $82 million compared to $375 million for the same period a year earlier. Excluding the revision of the estimated allowance of $185 million recorded in the first quarter of 2002, the provision for credit losses was reduced by $108 million for the six-month period.

As at April 30, 2003, allowances for credit losses exceeded impaired loans by $179 million compared to $159 million as at October 31, 2002, for an improvement of $20 million. New formation of gross impaired loans (less recoveries) amounted to $37 million for the quarter compared to $29 million for the previous quarter.

The ratio of gross private impaired loans to total tangible capital and allowances was 13.3% as at April 30, 2003 versus 14.1% as at October 31, 2002.

Market Risk – Trading Activities

The VaR (Value-at-Risk) method is one of the main tools used in managing trading-related market risk. The VaR measure is based on a 99% confidence level and uses two years of historical data for its computation. Market risk management is described in greater detail on page 49 of the 2002 Annual Report.

The following table entitled "Trading Activities" illustrates the distribution of market risk by type of risk, namely, interest rate, foreign exchange and price risk, including commodity and equity risk. Global VaR as at April 30, 2003 was down $1 million from the previous quarter mainly due to lower interest rate risk on trading activities.

Trading Activities (1)

(1) Amounts are presented on a pre-tax basis and represent one-day VaR.
(2) Global VaR takes into account the correlation effect from each of the risk categories through diversification.

Balance Sheet

As at April 30, 2003, the Bank's total assets amounted to $75.8 billion as against $74.6 billion as at October 31, 2002 and $74.7 billion as at April 30, 2002. The table below presents the main loan and deposit headings.

*including securitized assets

Residential mortgage loans totalled $17.5 billion as at April 30, 2003, up 2% from a year earlier. Excluding indirect loans, personal loans have risen by almost 11% since April 2002 to $3.7 billion. Credit card receivables increased by 12% year over year to reach $1.4 billion as at April 30, 2003. At $18.8 billion, business loans and acceptances were down $0.8 billion chiefly because of corporate loans and acceptances and international loans. Since October 31, 2002, business loans and acceptances have increased by close to 1%, largely through loans and acceptances to small and medium-sized enterprises.

Personal deposits have risen by more than $660 million since April 30, 2002 and by close to $630 million since October 31, 2002 to total $23.2 billion at the end of the quarter. Total personal savings administered by the Bank and its subsidiaries have grown by $1.6 billion since October 31, 2002 to reach $69.8 billion. As at April 30, 2003, business and government deposits were up more than $1 billion from April 30, 2002 and October 31, 2002, chiefly because of deposits from small and medium-size enterprises.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 9.8% and 13.9% respectively as at April 30, 2003 compared to 9.6% and 13.6% as at October 31, 2002. The improvement in capital ratios was mainly attributable to the issue of $200 million in preferred shares, offset in part by the common share repurchase program.

On May 15, 2003, the Bank redeemed first preferred shares, Series 12, for an aggregate consideration of $125 million. As a result of this redemption, capital ratios were reduced by approximately 30 basis points.

Dividends

At its meeting on May 29, 2003, the Board of Directors declared regular dividends on the various classes and series of preferred shares as well as a dividend of 28 cents per common share, payable on August 1, 2003 to shareholders of record on June 26, 2003.

 Caution regarding forward-looking statements