Friday, March 02, 2007

National Bank Q1 2007 Earnings

  
TD Newcrest, 2 March 2007

Event

NA reported EPS of $1.43, beating our estimate of $1.37 and consensus of $1.33, up from $1.31 in Q4/06 and $1.26 in Q1/06. Strong results were recorded in higher valuation multiple retail and wealth management businesses.

Impact

Positive. We are maintaining our BUY recommendation, and increasing our target price to $73.00 from $71.00. Our 2007 and 2008 EPS estimates both increase $0.10, to $5.70 and $6.10 respectively.

Details

Retail results were strong, with net income of $123 million (Exhibit 1 provides more detailed financial highlights), increasing 16% year over year reflecting:

• Asset growth of 5%.
• Margin improvement, up 3 bps to 2.90%.
• Efficiency improvements, with the efficiency ratio declining to 57.6% (from 62.3% in Q1/06). Management indicated that not all efficiency improvements were sustainable (we estimate approximately 117 bps), which we have incorporated in our earnings forecasts.
• Offset partially by slightly higher credit costs ($43 million); not cause for concern in our view.

Wealth management results were impressive. Net income was $45 million, up 22% from Q1/06, with particular strength in retail brokerage and mutual fund businesses. Expenses were controlled, with the efficiency ratio improving to 69.6% (from 71.8% a year ago). AUM/AUA growth was solid, up 3% year over year.

Financial Market earnings were robust with net income of $87 million, up 13% sequentially, and down slightly (4%) year over year.

Revenues were strong, driven by trading revenues and other sources. In our view, trading revenues of $112 million are relatively sustainable (and in line with average levels). In addition, investment gains were low at $29 million during the quarter, versus $36 million sequentially and $42 million in Q1/06, further adding to the quality of results.

Credit was controlled. The PCL rate was 0.22%, and GIL’s were $239 million, up slightly from $234 million at October 31, 2006. Formations were $234 million, down from $259 million a year ago.

Tier 1 capital was consistent at 9.9%. Capital management clearly distinguishes NA from the group. Management has been particularly aggressive at returning capital to shareholders (approximately 75% including both share buy backs and dividends per our calculation), which we expect to continue.

Justification of Target Price

Our $73.00 NA target price is a product of adding 50% of the $71.51 value derived from our 2007 P/E valuation of 13.4 times to 50% of the $72.49 value derived from our 2007 price-to-book valuation of 2.85 times.

Key Risks to Target Price

We believe that the four key valuation risks specific to NA that may prevent the stock from attaining our target price are: a) Unfavorable interest rate movements; b) Quebec sovereignty (we view this with a low probability); c) Lack of scale and financial flexibility; and d) Irrational pricing behavior from non-public competitor Desjardins.

Investment Conclusion

In summary, a flying start to the year fuelled by strength in retail and wealth management businesses. We continue to believe NA is a bargain at current levels, trading at a 1.6 times multiple discount to the group. In our view, political risk is shrinking in Quebec with latest opinion polls suggesting the Liberals have a clear lead in the run-up to the March 26th provincial elections. In addition, the bank has an excellent track record of returning capital to shareholders (including buy backs and dividends), has a steady wholesale business, and a dominant retail franchise in Quebec. We reiterate our BUY recommendation and increase our target price to $73.00 from $71.00.

Finally, Q1/07 was Real Raymond’s last quarter as Chairman and CEO, and we would like to congratulate him on yet another excellent quarter. Over the time he has been in charge of the bank, he has transformed it, and we believe Louis Vachon has inherited a strong franchise.
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Canadian Press, 1 March 2007

National Bank of Canada chief executive officer Real Raymond is winding up his 37-year career with Canada's sixth-largest chartered bank by posting the best quarterly results in its history.

It reported a record first-quarter profit of $240-million, up 11 per cent from a year earlier as revenue surpassed $1-billion for the second consecutive quarter.

For the quarter ended Jan. 31, diluted earnings per share rose to $1.43 from $1.26, the Montreal-based company said Thursday.

Analysts' consensus forecast was for earnings of $1.34 a share, before one-time items, according to Thomson Financial.

“Obviously I'm very pleased with the bank's first-quarter results which highlight the best-ever quarter in net income and certainly one of the best in terms of quality of earnings,” Mr. Raymond said in his final conference call before retiring on June 1.

Mr. Raymond, who will turn 57 before he retires, will become a part-time special adviser to the bank for a year after he vacates his post.

“It is rather nice for me to conclude my mandate as a CEO on such good results.”

He said all sectors contributed to the results, underlining the performance of the personal and commercial, and wealth management segments.

Robust growth in activities aimed at individuals and small and medium-sized businesses, along with cost controls were responsible for the improved position, the bank said.

Analysts credited Mr. Raymond for being the architect of “solid, high-quality numbers.”

“He's changed the entire culture of that bank,” said an analyst who didn't want to be named.

“It's a very, very, very well-run bank that shouldn't be trading at the kind of discount that it does to the other five Canadian banks.”

Louis Vachon, the chief operating officer who will take over as CEO from Mr. Raymond, said the bank is constantly facing the challenge of lower value.

Mr. Vachon told analysts it will be the summer or fall before he will give an indication of any strategic changes he hopes to pursue.

But Mr. Raymond said the National Bank has benefited from following a diversified and balanced strategy.

“With its dominant position in Quebec, National Bank is well-positioned to leverage on its privileged relationships with its customers,” he said, noting that the province's economy is healthy with good manufacturing output and employment.

Canada's bank CEOs will meet next week with Finance Minister Jim Flaherty to discuss bank service charges.

Mr. Raymond suggested lower fees could have an impact on the bank's profits even though he said they represent a small fraction of its $4-billion annual revenue.

“That being said, it's a very important component of our business and growth in the future so we're going to really have a good discussion with the minister on this issue.”

For competitive reasons, National Bank CFO Pierre Fitzgibbon declined to disclose fee revenue, but said the bank would likely try to make up any shortfall elsewhere.

“There's no doubt that if we would lose something we would try to make it up somewhere else, there's no doubt,” he said in an interview.

Since most of the automated machines in Canada are not controlled by banks, Mr. Fitzgibbon said any federal policy should apply fairly to all operators.

The bank's largest quarterly gains came in the wealth management segment, where net income grew 22 per cent to $45-million. Revenue increased 9 per cent, primarily because of vigorous retail brokerage activities.

Personal and commercial net income increased by 16 per cent to $123-million due to business growth and productivity improvements.

Financial markets net income was 4 per cent lower than in 2006 despite a 9-per-cent revenue increase on the strength of trading activities.

Return on common shareholders' equity rose to 20.7 per cent from 19.9 per cent.

The bank had $235.4-billion of assets under administration or management, up from $227.8-billion in 2005.

At its recent board meeting, the bank declared a 54-cent dividend per common share. That's up 13 per cent from last year.

The bank bought back 717,000 shares last quarter at an average price of $63.82 for $46-million. It plans to repurchase up to 8.1 million or 5 per cent of its outstanding shares this year.
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Bloomberg, Sean B. Pasternak, 1 March 2007

National Bank of Canada, the country's sixth-largest bank, posted an 11 percent jump in profit that topped analysts' estimates after collecting higher fees from consumer lending and mutual funds.

Net income for the first quarter ended Jan. 31 climbed to C$240 million ($204.7 million), or C$1.43 a share, from C$217 million, or C$1.26, a year earlier, the Montreal-based bank said today in a statement. The increase is the biggest in six quarters. Revenue rose 6.2 percent to C$1.05 billion.

The bank joins Toronto-Dominion Bank in recording bigger profits from consumer banking, as revenue from credit cards and loans increased. National Bank, which got more than half its profit from consumer banking, has agreements with financial- services companies including Power Financial Corp. to offer their clients cards and checking accounts.

``The bank should benefit from growth in consumer credit across Canada through its partnership program,'' TD Newcrest analyst Steve Cawley wrote yesterday in a note to investors.

Earnings from wealth management climbed 22 percent to C$45 million during the quarter because of higher fees from mutual funds and investment advice. The bank had C$143 million in net mutual fund sales during the quarter, compared with C$180 million in withdrawals during the year-earlier period, according to CIBC World Markets data.

A 5.6 percent gain for the Canadian benchmark stock index during the quarter helped push fund sales to a decade high in January, according to the Investment Funds Institute of Canada. The combined mutual fund assets for the Canadian banks rose 16 percent from a year earlier, according to analyst Kevin Choquette at Scotia Capital in Toronto.

National Bank's profit, which was a record, exceeded the C$1.33 a share average quarterly estimate of analysts surveyed by Bloomberg.

Consumer-banking profit increased 16 percent to C$123 million because of rising loans and deposits. Profit at the financial markets unit, which includes trading and investment banking, dropped 4.4 percent to C$87 million due to a ``significant'' decrease in gains on securities, the bank said without elaborating.

Shares of National Bank fell 59 cents to C$64.71 at 4:15 p.m. in trading on the Toronto Stock Exchange.
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