27 November 2008

National Bank's $237 Million Writedown for Q4 2008

Scotia Capital, 27 November 2008

• NA pre-released operating earnings of $1.09 per share below our estimate of $1.35 per share and consensus of $1.31 per share.

What It Means

• Reported earnings are expected to be $0.37 per share including a moderate $237M (0.99 per share) in net charges. Net charges include a $117M ($0.49 per share) charge against ABCP, a $66M ($0.27 per share) restructuring charge related to the transformation plan announced in September and $54M ($0.23 per share) writedown of tangible assets.

• Reported earnings also include a $65M ($0.27 per share) gain on sale of AMF Corp. to Credit Suisse previously announced on August 26, 2008.

• The charge against ABCP includes a valuation adjustment bringing total writedowns to 32% of the original notional value up from 25%.

• Tier 1 ratio is expected to remain solid at 9.4% versus 10.0% in Q3/08.

• We are reducing our 2008 earnings estimate to $5.48 per share from $5.74 per share due to lower fourth quarter results. We are reducing our target price to $55 from $65 due to investors' fears, not underlying value or earnings and dividend sustainability.
Bloomberg, Sean B Pasternak, 26 November 2008

National Bank of Canada, the country’s sixth-largest bank, reported fourth-quarter profit of about C$70 million ($56.6 million) after posting C$237 million in pretax writedowns for asset-backed commercial paper and other investments.

Excluding the costs, profit was C$1.36 a share, the Montreal-based bank said today in a statement releasing preliminary results. That compares with the C$1.34-a-share average estimate of 13 analysts surveyed by Bloomberg News. National Bank reported a net loss a year earlier.

The costs, which add to C$685 million in debt writedowns taken in the last five quarters, include C$117 million related to frozen commercial paper that hasn’t traded since August 2007.

“The ABCP writedown comes as no surprise given recent credit market deterioration,” Blackmont Capital Inc. analyst Brad Smith wrote in a note to investors. Smith, who rates National Bank shares a “hold”, said that the preliminary results are 5 cents a share higher than he was expecting.

There will also be C$54 million in charges to write down assets, and C$44 million in costs related to a business plan announced by Chief Executive Officer Louis Vachon in September aimed at trimming expenses, the bank said.

As part of that plan, 120 jobs have been cut since September, spokesman Denis Dube said in a telephone interview. About half of those positions are in the bank’s financial markets unit, which includes investment banking.

National Bank plans to add a “few hundred” employees to its consumer-banking unit over the next 12 to 24 months, Dube said. The bank has about 17,000 employees.

National Bank is the fourth Canadian lender to report preliminary results before their scheduled earnings date to reflect rising writedowns and credit losses. The bank will provide full results on Dec. 4.

Royal Bank of Canada, the biggest lender, said this week that profit probably fell 15 percent to C$1.1 billion, driven down by C$360 million in trading losses and writedowns.

Last week, Toronto-Dominion Bank reported preliminary results that missed analysts’ estimates after incurring a C$350 million trading loss. Bank of Nova Scotia said it had a C$890 million pretax writedown tied to trading and declining investments.

National Bank fell C$1.40, or 3.5 percent, to C$39.04 at 4:10 p.m. in trading on the Toronto Stock Exchange. The stock has fallen 25 percent this year, compared with a 33 percent drop for the nine-member S&P/TSX Banks Index.