National Bank posts excellent results for the third quarter of fiscal 2003 and achieves all of its objectives

• Net income of $162 million compared to $26 million for the corresponding quarter of 2002
• Record earnings per share of 89 cents versus 12 cents for the third quarter of 2002
• Two-fold increase in net income for Wealth Management over the corresponding period of 2002
• Excellent credit quality maintained

National Bank of Canada reported solid net income of $162 million for the third quarter ended July 31, 2003 compared to $138 million for the previous quarter (an increase of 17%) and $26 million for the corresponding quarter of 2002. In the third quarter of 2002, the Bank had recorded an impairment charge of $112 million (after taxes) further to the revaluation of its investment in an information technology firm.

Excluding this charge, net income for the third quarter of 2003 was up $24 million or 17% over the third quarter of 2002. Earnings per share were a record $0.89 for the quarter versus $0.73 for the previous quarter and $0.12 for the corresponding quarter of 2002 ($0.73 excluding the impairment charge, for an increase of 22%). Return on common shareholders' equity was 17.3% for the quarter compared to 14.8% for the previous quarter and 2.3% for the third quarter of 2002 (14.6% excluding the impairment charge).

All sectors contributed to the Bank's excellent third-quarter results, especially Wealth Management, which posted net income of $21 million, for an increase of $11 million or 110% over the corresponding quarter of 2002, owing to renewed trading by individuals and the contribution of Altamira. In relation to the previous quarter, net income at Wealth Management rose $4 million or 24%.

Personal and Commercial recorded net income of $86 million for the third quarter of 2003, up $14 million or 19% over the previous quarter. Net income at Personal and Commercial for the corresponding period of 2002 was $84 million.

Net income at Financial Markets was $61 million for the third quarter of 2003 compared to $37 million for the previous quarter and $55 million for the third quarter of 2002. Treasury's excellent performance and a slight rally in trading by institutional investors accounted for the rise in the sector's net income.

Commenting on these results, Réal Raymond, President and Chief Executive Officer, pointed out that National Bank has met, and in many cases exceeded, its target objectives.

"I am very pleased with the Bank's strong performance since the start of the fiscal year," he stated. "The Bank continues to actively pursue its strategic priorities."

For the nine-month period ended July 31, 2003, net income stood at $466 million, for an increase of $172 million or 59% compared to the corresponding period of 2002 (up $60 million or 15% excluding the impairment charge for an investment). Earnings per share reached $2.50 for the period compared to $1.47 for the corresponding period of 2002 ($2.08 excluding the impairment charge). Aside from the impairment charge taken in 2002, the decline in the provision for credit losses was the main driver behind the strong increase in net income for the period.

As at July 31, 2003, specific and general allowances exceeded gross impaired loans by $172 million compared to $159 million as at October 31, 2002.

During the quarter, the Bank completed its normal course issuer bid for the repurchase of 9.1 million common shares.

Business Development

The Bank continued to ensure integration with its partners under the agreements concluded last year and to maximize the resulting business opportunities. In fact, following the distribution agreement signed in November 2002 with Investors Group, Great-West Life and London Life, the Bank's products are now available, under the Investors Group banner, through all of this company's offices across Canada. Great-West Life and London Life will also begin offering the Bank's products in the fall.

The Bank also finalized the integration of Altamira Securities, a brokerage subsidiary of Altamira, the fund manager and distributor it acquired in June 2002, with its own National Bank Discount Brokerage subsidiary. As of September 8, customers of this firm, which will now go by the name Altamira Securities, a Division of National Bank Discount Brokerage, will be able to take advantage of competitively-priced service featuring an attractive range of products and detailed statements of account, in addition to the support of a top-rated team of representatives. The new Altamira Securities website will also offer customers a wealth of information and financial advice and allow them to carry out their transactions online.

In keeping with its strategy of making further inroads into its markets outside Quebec, on July 10, 2003 the Bank signed a new partnership agreement for the distribution of its banking products with MD Management Ltd., a subsidiary of the Canadian Medical Association. MD Management Ltd. is the only financial services organization dedicated to understanding and meeting the financial needs of Canadian physicians and their families. It has over $14 billion in assets under management and serves tens of thousands of Canadian physicians. Under the terms of this 5-year agreement, Financial Consultants at MD Management will offer the Bank's complete range of products to their customers, thereby ensuring that all their financial needs are met.

Lastly, a new team of account managers based throughout Quebec was set up in May to provide personalized advisory services to a group of business clients with deposits at the Bank. This initiative will enable us to foster closer ties with this lucrative clientele and to offer new products and services to these businesses as well as their managers.

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 third quarter of 2003

• A conference call for financial analysts will be held on August 28, 2003 at 1:30 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 September 4, 2003 by calling 1-800-408-3053 or (416) 695-5800. The access code is 1462970.
• A recording of the webcast will also be available on the Internet after the call at www.nbc.ca/investorrelations.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 third quarter and for the nine-month period ended July 31, 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 third quarter and the nine-month period ended July 31, 2003.

(1) Excluding the impairment charge for an investment in 2002

Analysis of Results

Operating Results

For the third quarter ended July 31, 2003, the National Bank earned net income of $162 million, compared to $26 million for the third quarter of 2002 ($138 million if the impairment charge for an investment is excluded). Earnings per share were $0.89 for the quarter versus $0.12 for the corresponding period of 2002 ($0.73 if the impairment charge for an investment is excluded). Return on common shareholders' equity rose to 17.3% for the third quarter of 2003 as against 2.3% for the quarter ended July 31, 2002 (14.6% if the impairment charge for an investment is excluded).

For the nine-month period ended July 31, 2003, the National Bank recorded net income of $466 million compared to $294 million for the same period of 2002, representing an increase of 59% ($60 million or 15% if the impairment charge for an investment is excluded). At $2.50 for the first nine months of fiscal 2003, earnings per share were up 70% versus $1.47 for the corresponding period of 2002 ($0.61 per share or 20% if the impairment charge for an investment is excluded). Return on common shareholders' equity rose to 16.6% for the nine-month period ended July 31, 2003 versus 10.1% for the first nine months of 2002 (14.2% if the impairment charge for an investment is excluded).

Revenues

Total revenues for the third quarter of 2003 were $851 million, an increase of $194 million, or 30%, compared to $657 million for the year earlier period.

Net interest income amounted to $305 million for the third quarter of 2003, down $41 million from $346 million for the corresponding period of 2002. The decrease was primarily due to interest charges on index-linked deposits for which returns are tied to that of external traders. Revenues generated by the External Trader Program are recorded as income from trading activities and included with other income, while interest on deposits for which returns are linked to that of the External Trader Program are included with net interest income. This program's solid performance during the quarter accounted for the decline in net interest income for Financial Markets as well as part of the increase in income from trading activities. Moreover, net interest income for Personal and Commercial rose by $17 million or 6% to $316 million, mainly owing to the spread, which improved from 3.11% in the third quarter of 2002 to 3.24% this quarter.

Other income for the quarter totalled $546 million as against $311 million for the third quarter of 2002, up $235 million. Capital market fees rose $11 million as trading activity by both individual and institutional investors on capital markets picked up. Income from trading activities and gains on securities increased $189 million to $109 million. In the third quarter of 2002, the Bank had recorded a $137 million impairment charge for an investment in a technology company. The remainder of the difference stemmed primarily from trading activities at National Bank Financial and Treasury, in particular, the External Trader Program. Income from trust services and mutual funds grew by $14 million, or 37%, owing primarily to the addition of income from Altamira.

For the first nine months of 2003, total revenues amounted to $2,459 million, for an increase of $226 million, or 10%, over the same period in 2002. The rise was chiefly attributable to trading activities and gains on securities, in particular, the $137 million impairment charge on an investment in 2002 and the solid performance of trading activities at Treasury and National Bank Financial, including the contribution of activities at Putnam Lovell.

Operating Expenses

Operating expenses for the third quarter of 2003 were $558 million compared to $508 million for the corresponding period of 2002. Salaries and employee benefits, representing $325 million and 58% of operating expenses, increased $46 million, mainly due to the acquisition of Altamira and the variable compensation at Treasury and National Bank Financial.

For the nine-month period ended July 31, 2003, operating expenses were $1,635 million, up $135 million, including $93 million attributable to the acquisition of Altamira and Putnam Lovell. If the impact of acquisitions is excluded, operating expenses increased 3% compared to the same period 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 tax-exempt 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 $86 million compared to $84 million for the corresponding period of 2002, which had been the best quarter of 2002 for this segment. Net interest income, which totalled $316 million, rose $17 million owing mainly to the spread, which went from 3.11% in the third quarter of 2002 to 3.24% this quarter. Other income was up by $6 million to $165 million, primarily attributable to commercial lending fees and insurance activities. Operating expenses for the quarter were $295 million compared to $273 million for the third quarter of 2002. Nearly 20% of the increase stemmed from investments required for new partnerships. Expected losses remained relatively stable at $52 million for the quarter compared to $53 million for the corresponding quarter of 2002.

For the first nine months of 2003, net income for Personal and Commercial amounted to $249 million, up $33 million or 15%. Net interest income was $928 million, an increase of $41 million, or nearly 5%, primarily due to the spread, which improved 12 basis points to 3.22% for the first nine months of 2003. Other income was up $26 million, or almost 6%, to $468 million chiefly owing to commercial lending fees and revenues from insurance and credit card activities. Operating expenses for the quarter were $850 million, or $30 million more than for the same period of 2002. The efficiency ratio improved, dipping from 61.7% for the first nine months of 2002 to 60.9% for the period ended July 31, 2003.

Wealth Management

Net income for the Wealth Management segment reached $21 million for the third quarter of 2003, more than double that for the corresponding quarter a year earlier. Revenues amounted to $166 million this quarter versus $138 million for the same period of 2002, representing growth of 20%. The addition of $15 million in revenues from Altamira as well as increased trading activity by individuals on capital markets accounted for the strong growth in income for this segment. Operating expenses for the third quarter were $132 million compared to $120 million for the same period of 2002. The increase was due to the addition of operating expenses from Altamira and variable compensation at the Bank's brokerage subsidiary.

For the nine-month period ended July 31, 2003, net income for Wealth Management amounted to $57 million as against $50 million for the same period a year earlier, up 14%. The contribution of Altamira, offset in part by lower brokerage activities, accounted for the growth during the period.

Financial Markets

For the third quarter of 2003, Financial Markets posted net income of $61 million as against $55 million for the same period of 2002, for an increase of $6 million or 11%. Revenues for the quarter reached $232 million, up $30 million or 15%, primarily due to income from trading activities at both Treasury and National Bank Financial. At $129 million, operating expenses rose by $26 million compared to the third quarter a year earlier. Nearly half of the increase was attributable to variable compensation at Treasury and the Bank's brokerage subsidiary while the remainder was due to the addition of Putnam Lovell expenses. Expected loan losses were $9 million for the 2003 third quarter compared to $11 million for the same period of 2002.

For the first nine months of 2003, net income for Financial Markets was $162 million, down $28 million from the same period a year earlier. Revenues were $656 million for the period compared to $629 million for the corresponding period of 2002, for an increase of 4%. Operating expenses were $374 million for the nine-month period ended July 31, 2003, versus $296 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 nine months was $31 million as against $32 million for the same period in 2002.

Other

The net loss for the "Other" heading totalled $6 million for the third quarter of 2003 compared to a loss of $123 million for the same period in 2002. In the third quarter of 2002, the Bank had recorded a $112 million (after tax) impairment charge for an investment in a technology company.

For the nine-month period ended July 31, 2003, the net loss for the "Other" heading was $2 million as against $162 million for the corresponding period of 2002. Revenues were higher by $105 million mainly because of an impairment charge for an investment recorded a year earlier. The favourable $299 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, the $30 million reduction in the general allowance for credit risk and the difference between the expected losses charged to the business units and the actual losses incurred. These favourable variances were offset in part by the $115 million net gain recorded in 2002 under "Discontinued Operations" generated by the sale of U.S. asset-based lending operations.

Risk Management

Credit Risk

The provision for credit losses for the quarter was $45 million as against $62 million for the corresponding quarter of 2002. For the first nine months of fiscal 2003, credit losses were $127 million compared to $437 million for the same period a year earlier. Excluding the revision of the estimated allowance of $185 million recorded in 2002, the provision for credit losses was reduced by $125 million for the period.

As at July 31, 2003, allowances for credit losses exceeded impaired loans by $172 million, compared to $159 million as at October 31, 2002, for an improvement of $13 million. New formation of gross impaired loans (less recoveries) amounted to $40 million for the quarter compared to $37 million for the previous quarter.

The ratio of gross private impaired loans to total tangible capital and allowances was 13.2% as at July 31, 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 more 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 commodity and equity price risk. For the third quarter of 2003, price risk was presented in two components: equities and commodities. Global VaR as at July 31, 2003 was at more or less the same level as for the previous quarter.

Trading Activities (1)
(millions of dollars)

(1) Amounts are presented on a pre-tax basis and represent one-day VaR.
(2) Price risk has been presented in two components for the quarter ended July 31, 2003.
(3) Global VaR takes into account the correlation effect from each of the risk categories through diversification.

Balance Sheet

As at July 31, 2003, the Bank's total assets amounted to $78.4 billion compared to $74.6 billion as at October 31, 2002 and $72.3 billion as at July 31, 2002. The table below presents the main loan and deposit headings.

*including securitized assets

As at July 31, 2003, residential mortgage loans totalled $17.9 billion, up approximately 3% from both October 31, 2002 and the previous year. Excluding indirect loans, personal loans have risen by 8% since July 2002 to $4.1 billion. Credit card receivables increased by 10% year over year, and by 7% since the beginning of the fiscal year, to $1.5 billion as at July 31, 2003. At $18.1 billion, business loans and acceptances are comparable to $18.7 billion as at October 31, 2002 and to $18.3 billion a year earlier. This decline stems mainly from corporate loans.

Personal deposits have risen by approximately $1 billion over the past year and by $900 million since October 31, 2002, for a total of $23.5 billion as at July 31, 2003. Off-balance sheet personal savings administered by the Bank and its subsidiaries have grown by $3.2 billion since October 31, 2002, to $48.9 billion, especially for the brokerage subsidiaries. Business deposits were up by almost $600 million from July 31, 2002 and by approximately $900 million from October 31, 2002, chiefly because of deposits from small and medium-sized enterprises.

Capital

Tier 1 and total capital ratios, in accordance with the rules of the Bank for International Settlements, were 9.5% and 13.5% respectively as at July 31, 2003 compared to 9.6% and 13.6% as at October 31, 2002. The slight decrease in capital ratios was mainly attributable to the normal course issuer bid program to repurchase 9.1 million common shares and the redemption of $125 million of Series 12 preferred shares on May 15, 2003. The decrease was mitigated by the issue of $200 million of preferred shares in the first quarter of 2003.

Dividends

At its meeting on August 28, 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 November 1, 2003 to shareholders of record on September 25, 2003.

Caution regarding forward-looking statements

As part of its analyses and reports, National Bank of Canada from time to time makes forward-looking statements concerning the economy, market changes, the achievement of strategic objectives, certain risks and other related matters.

By their very nature, such forward-looking statements involve inherent risks and uncertainties. It is therefore possible that express or implied projections contained in such statements will not materialize and will differ materially from actual future results. Such differences may be caused by factors which include, but are not limited to, changes in Canadian and/or global economic conditions, particularly fluctuations in interest rates, currencies and other financial instruments, market conditions, technological changes or regulatory developments.

Investors and others who base themselves on the Bank's forward-looking statements to make decisions should carefully consider the above factors as well as the uncertainties they represent and the risks they entail. The Bank therefore cautions readers not to place undue reliance on these forward-looking statements.

About the National Bank of Canada

National Bank of Canada is an integrated group which provides comprehensive financial services to consumers, small and medium-sized enterprises and large corporations in its core market, while offering specialized services to its clients elsewhere in the world. The National Bank offers a full array of banking services, including retail, corporate and investment banking. It is an active player on international capital markets and, through its subsidiaries, is involved in securities brokerage, insurance and wealth management as well as mutual fund and retirement plan management. The National Bank has assets of over $75 billion and, together with its subsidiaries, employs over 17,000 people. The Bank's securities are listed on the Toronto Stock Exchange (NA:TSX). For more information, visit the Bank's website at www.nbc.ca.

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 Third Quarter 2003 (113K)

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