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Report on Business National Bank profit climbs on strength in personal, commercial banking

Quebec’s economy is on a roll and the National Bank of Canada took advantage of rosy conditions in the third quarter, reporting a 7-per-cent rise in profit driven by strong personal and commercial banking results.

Total bank profits reached $608-million, outpacing analysts’ expectations, while earnings from retail banking rose 11 per cent to $277-million. The bank’s financial-markets arm also posted record returns from trading, making the most of volatile market conditions.

The Montreal-based bank, which is Canada’s sixth-largest by assets, is heavily weighted toward the province of Quebec and Canada more broadly. And while several of its peers have reaped the rewards of extensive international footprints in recent quarters, the relative strength of Canada’s economy at a moment of global economic uncertainty helped the National Bank stand out in the third quarter, as other major banks posted mixed results.

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Quebec’s real GDP rose for the eighth straight month in May, expanding at an annualized rate of 3.5 per cent – more than twice the 1.5-per-cent pace for Canada as a whole. That is the longest streak of expansion in the 22 years the data has been collected.

“I think the growth story [in Quebec] still has some legs for the foreseeable future," said Louis Vachon, National Bank’s chief executive. With lower consumer indebtedness and strong labour-force participation, he added, “should there be a slowdown or a recession, Quebec’s economy could be a little bit more resilient."

National Bank earned $1.66 a share in the three months that ended July 31, up 9 per cent from $1.52 a year ago. Analysts had expected earnings per share of $1.59, on average, according to Refinitiv.

In the U.S. and specialty finance division, a profit of $69-million was up 28 per cent from a year ago, driven by higher revenue from ABA Bank, a subsidiary in Cambodia. The National Bank also reached a deal to buy the 10-per-cent stake in ABA bank that it didn’t already own from Damir Karassayev, the former head of the Kazakhstan Stock Exchange. The purchase is subject to approvals from Cambodia’s central bank, and terms were not disclosed.

Since the National Bank first invested in ABA in 2014, the Cambodian bank’s share of the local banking market has doubled and its client base has grown from 60,000 to about 500,000, while generating an attractive return on equity. As a result, the National Bank is sharpening its focus on Cambodia, while looking to gradually sell off its minority interests in other financial groups in French-speaking Africa and Asia. “We’re not seeking expansion in other countries," Mr. Vachon said.

In the third quarter, the National Bank took a $27-million writedown on the value of its stake in NSIA Bank, based in Ivory Coast, as well as further charges amounting to $82-million on obsolete equipment, provisions on contracts and severance pay. Those were largely offset by a $68-million gain on a previously announced sale of shares in Fiera Capital Corp., and a $43-million gain relating to the sale of the National Bank’s Montreal headquarters, which is being replaced by a new tower under construction.

Profit from the financial-markets division rose 2 per cent to $182-million, driven by large gains in both equities and fixed-income trading. “We have a trading operation that tends to perform well in volatile markets,” Mr. Vachon said.

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Even so, the National Bank is adopting a cautious position, watching its expenses, capital and the health of its credit portfolios carefully. Provisions for loan losses, which are the funds banks set aside to cover bad loans, increased 13 per cent to $86-million, as the bank expects more losses on personal loans, credit card receivables, and loans in its financial-markets arm. Although its provisions are still modest by historical standards, the bank also tweaked its models to account for more pessimistic economic forecasts.

“When you see something like an inverted yield curve," Mr. Vachon said, “that’s something you have to take seriously.”

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