National Bank profit slides as economic gloom weighs on second-quarter earnings

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National Bank of Canada posted a drop in profit on higher costs and rising reserves for potentially sour loans as the threat of a recession drags on results across the banking sector.

National Bank NA-T is the final major Canadian bank to report earnings for the fiscal second quarter, joining most of its peers in undergoing slower growth. A worsening economic outlook has weighed on bank earnings as high interest rates squeeze margins and concerns over loan losses mount.

“The economy is adjusting to a higher-rate environment and much uncertainty remains around the path of interest rates and inflation,” National Bank chief executive officer Laurent Ferreira said during a conference call with analysts.

National Bank earned $847-million or $2.38 a share in the three months that ended April 30, compared with $889-million or $2.53 in the same quarter last year.

The bank said its adjusted earnings, which account for one-time items, also came in at $2.38 a share. That fell just below the $2.39 analysts expected, according to Refinitiv, evading the steeper misses of many of the other large Canadian lenders.

National Bank’s shares fell 2.8 per cent on Wednesday, leading bank stocks lower as investors continue to sour on the near-term challenges putting pressure on the sector.

“While [National Bank] could not avoid the same pressures on top-line growth and expense inflation, it navigated better than most of its peers,” Barclays analyst John Aiken said in a note to clients. “However, we do note that its earnings were supported by better-than-forecast [loan loss] provisions.”

The rest of the Big Six banks reported results last week, with Canadian Imperial Bank of Commerce CM-T beating analyst expectations while Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Bank of Nova Scotia BNS-T and Bank of Montreal BMO-T posted worse-than-expected results.

In the quarter, National Bank set aside $85-million in provisions for credit losses – the funds banks set aside to cover loans that may default. That was lower than analysts anticipated, and included $27-million against loans that are still being repaid, based on models that use economic forecasting to predict future losses.

In the same quarter last year, National Bank booked $3-million in provisions, as loan loss reserves edged higher from reversals in prior periods when defaults were low.

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The bank’s net interest margin – the difference between the amount lenders pay on deposits and charge on loans – fell 10 basis points from the previous period, but that was in part owing to a few one-time items that boosted its results in the first quarter. (One hundred basis points equal one percentage point.) Excluding those items, margins were relatively flat.

National Bank expects margin pressure to continue in the coming quarters as high interest rates push customers to move their cash from cheaper chequing accounts to costlier fixed-term savings products. This means that banks have to pay clients more in interest to maintain those deposits, putting pressure on their net interest margins.

Higher interest rates are also easing loan demand – especially in mortgage lending – further squeezing margins.

Total revenue rose 2 per cent to $2.48-billion in the quarter, but expenses climbed 6 per cent to $1.37-billion, which the bank said was driven by an increase in hiring last year, wage inflation and technology expenses.

Profit from personal and commercial banking was $335-million, up 14 per cent from a year earlier, as revenue growth was slightly offset by rising costs and provisions for credit losses. Personal loans grew 4 per cent and commercial lending increased 13 per cent year over year.

The wealth management division generated $178-million of profit, up 9 per cent on higher net interest income.

Net income in the financial markets unit fell 7 per cent to $268-million as employee and operational costs rose. And profit from the bank’s U.S. arm dropped to $128-million from $152-million in the same quarter a year earlier, as higher costs and provisions for credit losses offset stable revenue.

National Bank raised its quarterly dividend by 5 cents to $1.02 a share for the quarter ending July 31.