A strong economy helped boost National Bank of Canada’s third-quarter profit by 10 per cent, but the bank’s leaders are preaching discipline in lending as consumers temper their borrowing and competition for commercial loans heats up.
Canada’s fifth-largest lender reported good gains from each of its core businesses, including a 6-per-cent bump in profit from Canadian retail and commercial banking, to $235-million, helped by growing balances in mortgages and loans to businesses.
Credit losses remained modest across Canada’s largest banks in the third quarter, National Bank included, and the lenders' loan portfolios show no signs of trouble. Yet while business is good – particularly in Quebec, where unemployment is low and consumers carry less debt relative to income – National Bank chief executive Louis Vachon has been vocal about the fact that Canada has had 10 years of economic expansion, and it’s only wise to avoid getting carried away when no one can predict how soon the next downturn might come.
“Let me just be clear: We’re not in a risk-avoidance mode, we’re in a risk-management mode,“ Mr. Vachon said, on a Wednesday conference call. “So we’re still taking risks, we’re just being selective about it.”
Case in point: National Bank increased its commercial loan balances by 8 per cent in the third quarter, while several rivals posted double-digit gains, but National Bank has occasionally passed on opportunities when the margins on offer didn’t justify the risk. Mr. Vachon said the bank’s leaders are conscious of the need to keep internal expectations and targets reasonable, so employees don’t feel undue need to chase growth “at all costs” under competitive pressure from rival banks.
“We’re trying very hard, understanding that we all manage very large and very complex organizations, to stay within our risk box,” Mr. Vachon said in an interview. “And that’s where the pressure is: It’s not prevalent, it’s not generalized, but you do sense that you’re kind of being forced a little bit outside of the risk box in some of the deals right now.”
The bank’s loan losses rose 31 per cent to $76-million compared with a year ago, mainly because of a single commercial lending account, which executives described as an anomaly.
For the quarter that ended July 31, National Bank reported profit of $569-million, or $1.52 a share, compared with $518-million, or $1.37, a year ago.
Adjusted for special items, National Bank said it earned $1.53 a share, three cents ahead of the $1.50 consensus estimate among analysts, according to Thomson Reuters I/B/E/S.
Third-quarter revenue rose 6 per cent to $1.8-billion, while expenses rose 4 per cent, as the bank continues to focus intensely on containing costs.
National Bank’s focus on managing risk-taking extends to the mortgage market, where consumers are adjusting to tougher stress-testing rules introduced by Canada’s banking regulator at the start of the year. The bank’s mortgage portfolio grew 3 per cent, year over year, as some customers settle for slightly smaller home loans, which has helped curb the rise in household indebtedness seen last year. “We’ve seen a slowdown,” Mr. Vachon said, “but not a collapse.”
He also said that clients' use of home-equity lines of credit, or HELOCs, shows early signs of tapering, as some customers cash in investment gains to pay down credit lines on their homes. Over all, as debt-to-income levels have begun to flatten out after reaching record levels last year, “it’s a good environment,” he said, with room for banks to grow without the debt burden reaching unsustainable levels.
“I’m knocking on wood,” he added. “It looks as though the soft landing scenario for the Canadian real estate market, the one that we’ve been hoping for, is appearing to be much more likely at this stage than it did two years ago.”
Profit from wealth management surged 22-per-cent higher than a year ago, to $126-million, helped by rising interest rates that boosted interest income. And profit from the U.S. specialty finance and international division rose 6 per cent to $54-million, fuelled by rapid expansion in National Bank’s ABA Bank subsidiary in Cambodia.
The bank’s capital-markets arm reported $178-million in profit, up 8 per cent from the same quarter last year. On Wednesday, National Bank also announced it has promoted Laurent Ferreira to be co-head of the division, joining incumbent leader Denis Girouard. Both Mr. Vachon and Mr. Girouard described Mr. Ferreira’s elevation as a logical step, formalizing a partnership that effectively already existed. Mr. Ferrreira is 47 years old, and Mr. Girouard is 61, “so over a long period of time, I think it helps succession, but not in the immediate term,” Mr. Vachon said.