01 June 2007

National Bank Q2 2007 Earnings

Analysts' ratings and target prices for National Bank of Canada:

• BMO Capital Markets maintains "market perform," 12month target price is cut to $70

• Blackmont Capital maintains "hold," 12 month target price is $67.50

• Credit Suisse maintains "outperform," the target price has been raised from $72 to $73.

Credit Suisse notes that National Bank has reported Q2 2007 EPS significantly ahead of consensus and ROE in-line with estimates. National Bank's revenues grew by 9.5% YOY due to the higher contribution from the Financial Markets unit. The bank hiked its dividend by 11% and bought back 2.2 million shares in the quarter.

• Desjardins Securities upgrades from "hold" to "buy," 12 month target price is $70.50

• RBC Capital Markets maintains "underperform," 12 month target price is $65

• Scotia Capital maintains "underperform," 12 month target price is $77

• TD Securities downgrades from "buy" to "hold," 12 month target price has been reduced from $73 to $71
RBC Capital Markets, 1 June 2007

Core diluted cash EPS of $1.40 were ahead of our expectations of $1.32 and consensus estimates of $1.33 (up 14% YoY). The positive variance came from Financial Markets ($95 million of net income versus our $70 million estimate, driven by continued strong trading revenues, higher than expected capital market fees and "other"), offsetting a $7 million shortfall versus our estimate in Personal and Commercial banking on lower than expected net interest income margins and other income. The dividend was increased to $0.60 from $0.54 and management indicated that it may raise the dividend again next quarter. We have raised our 2007E EPS by $0.10 to $5.60 to reflect the positive earnings variance in Q2/07 but are leaving our 2008E EPS unchanged at this time. Our 12-month target is also unchanged.

We maintain our Underperform rating. National Bank trades at a 0.8x 2008E P/E discount to the group, in line with its average of the last five years, and we do not believe the discount will narrow in the coming year as EPS growth should lag the group. National Bank's current provisioning rate is more at risk of rising than other banks' in our view, retail loan growth has slowed in Quebec due to increased competition, and the company's successful partnership programs with wealth management firms are not yet large enough to offset slower growth in the bank's base market. Securities gains were also abnormally high in 2006. The proportion of earnings coming from wholesale businesses is also higher than for peers, supporting a lower multiple. Our 12-month price target of $65 implies a forward P/E multiple of 11.2x, compared to the current multiple of 11.6x.
Reuters, Lynne Olver, 31 May 2007

National Bank of Canada reported a 9% increase in second quarter earnings yesterday on the back of higher profits in its financial markets and wealth management segments, and the bank also raised its dividend.

Another dividend hike may be just a few months away, as National Bank's dividend payout ratio of 38% is below its target range, incoming CEO Louis Vachon said on a conference call.

"We'll be reviewing our dividend again next quarter and if earnings allow, then we'll certainly increase our dividend again to bring it within the 40% to 50% [payout] target," said Mr. Vachon, who will take over the top job today from retiring CEO Real Raymond.

Canada's sixth-biggest bank reported earnings of $233-million, or $1.40 a share, in the three months ending April 30. That compared with earnings of $214-million ($1.26) in the same period a year ago. Analysts had expected National Bank to report earnings of $1.32 a share before items, according to a poll by Reuters Estimates.

As expected, the bank boosted its dividend to 60? a share, up 11%.

National Bank also announced management changes, including a new chief financial officer.

Jean Dagenais becomes senior vice-president and chief financial officer. He replaces Pierre Fitzgibbon, who is moving to become president and CEO of biotechnology company Atrium Innovations, based in Quebec City.

National Bank said personal and commercial banking income rose 6% in the second quarter to $110-million, due to "sustained growth in retail loan and deposit volumes."

Earnings in the financial markets unit jumped 32% to $95- million, thanks to "significantly higher" fees and trading revenues.

In its wealth-management segment, National Bank's profit climbed 10% to $43-million.