Volatile financial markets sapped the strength from an otherwise solid first quarter at National Bank of Canada.
Profit and revenue for the country’s sixth-largest bank were effectively flat compared with a year ago, as a 17-per-cent decline in profit from the financial-markets arm offset gains in all other key divisions.
National Bank is the fourth of Canada’s Big Six banks to report fiscal first-quarter results this earnings season, and each has reported weaker results from capital markets, compared with the same period last year, after turbulence in financial markets at the end of 2018. But while National Bank missed analysts’ profit expectations, the underlying trends in several of its core businesses continue to look stable, and the bank hopes it will look back at the first quarter as a minor speed-bump.
“I think we’re hopeful that the [first-quarter] experience, especially in capital markets … was a one-off. It certainly appears to be that way," said Louis Vachon, chief executive officer of National Bank. “We’re hopeful that in the next few quarters, the revenue line will be better.”
National Bank’s financial markets division was its major weak spot, as profit fell to $170-million from $204-million a year ago. The decline was consistent with the troubles encountered by other large banks’ capital-markets arms after choppy market conditions through much of November and December. As companies took a pause, National Bank’s corporate and investment banking revenue fell 12 per cent, compounded by lower gains on investments.
But investment banking results tend to vary more than retail banking or wealth management, and are being treated more as an anomaly than a trend. “We tend not to get too excited when earnings exceed expectations owing to strength in market-sensitive revenues and so are disinclined to fuss too much about volatility-induced weakness this time around,” Robert Sedran, an analyst at CIBC World Markets Inc., said in a research note.
For the quarter that ended Jan. 31, National Bank reported a profit of $552-million, or $1.50 a share, compared with $550-million, or $1.46 a year ago.
Analysts surveyed by Thomson Reuters I/B/E/S were expecting share earnings of $1.54.
The bank also held its quarterly dividend steady at 65 cents a share.
Profit from personal and commercial banking increased 7 per cent to $246-million, as mortgages helped drive personal lending 5 per cent higher, and commercial loans increased by 10 per cent. Mortgage loans increased 5 per cent, driven by a healthy real estate market in Quebec, where the bank issues more than half of its home loans. After a recent decision to pull back from the use of third-party mortgage brokers, National Bank has begun soliciting mortgages in Quebec through a new partnership with brokerage M3.
“We’re nuancing the policy,” Mr. Vachon said, noting that the bank still doesn’t plan to use third-party brokers outside Quebec. “It’s a targeted market with a much better track record."
In wealth management, profit rose 10 per cent to $125-million thanks to growing deposit volumes and better margins on those deposits. And the U.S. specialty finance and international division increased its earnings 20 per cent to $60-million, largely owing to better performance by the bank’s ABA Bank subsidiary in Cambodia.
National Bank’s credit quality was virtually unchanged year-over-year, with provisions for credit losses – the funds banks set aside to cover loans that may go bad – edging $1-million higher to $88-million. While provisions for performing commercial loans and financial markets loans were higher, that was offset by lower expected losses on personal loans and at the bank’s Credigy Ltd. subsidiary.