National Bank ends fiscal year with strong fourth quarter

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National Bank of Canada capped off a better fiscal year with strong fourth-quarter profit as the Montreal-based lender enters a new phase of an aggressive plan to redefine itself.

Canada's sixth-largest bank hiked its quarterly dividend by 3 per cent to 60 cents a share and reported impressive growth from each of its key divisions in the three months that ended Oct. 31. The bank even boosted returns from its capital-markets arm in a period when competitors struggled with a dearth of trading.

But it was National Bank's renewed commitment to efficiency that caught analysts' attention. And chief executive officer Louis Vachon said the bank is now shifting from a phase of heavy cost-cutting and job losses to one that reduces costs by using technology to automate more of its processes.

The sense of urgency in the bank's executive ranks was born out of a difficult stretch that began in 2015. In a 12-month span, National Bank took a $165-million writedown on its investment in Maple Financial Group Inc., then had to raise $300-million in a share issue. That was followed by a $250-million provision for expected losses from the energy sector and a $175-million restructuring charge. But the missteps served as a wake-up call inside the bank, which sped up plans to digitize operations, change the culture and keep a tight lid on costs.

The oil and gas losses coming on the heels of 2015's surprise share issue "was really a serious kick in the ass to the management team of this bank," Mr. Vachon said on Friday in a conference call. "So as an organization, we really said, okay guys, I think we can do better than this. … We're really going to transform this bank."

The benefits to investors are beginning to show, as the bank's efficiency ratio improved by more than 3 percentage points in the quarter to 55.2 per cent, compared with the final quarter of 2016.

Like its peers, National Bank is investing heavily in digitization and back-office automation, even after shedding about 600 jobs. The bank is spending a total of $750-million a year on technology, about $350-million of which goes to new projects.

"It is a big transformation but we feel it has momentum, and we still have more to do," Mr. Vachon said.

Profit from the core personal and commercial banking segment was $239-million in the fourth quarter, compared with $191-million a year earlier, as loans and deposits grew and deposit margins improved. The wealth-management arm also posted a 29-per-cent increase in profit to $110-million.

National Bank's mortgage portfolio grew 3.3 per cent from a year earlier to $50.5-billion – slower than many of its peers. But the bank anticipates only a modest slowdown when new stress testing on some mortgages begins in January. Nearly two-thirds of its retail mortgage portfolio is concentrated in Quebec, where the rise in housing prices has been more restrained.

"The estimate we have is [the new stress test will] reduce new origination volume by 5 to 7 per cent," Mr. Vachon said in an interview.

Returns from the bank's capital-markets arm bucked a trend of declining trading activity across the industry with a 2-per-cent rise in trading revenue, thanks largely to 11-per-cent better revenue from equity securities. Profit of $186-million from the division came in $10-million higher than a year ago.

"Trading revenues zigged while all the other banks seem to be zagging this quarter, showing an admirable stability in the face of a weak environment," said Robert Sedran, an analyst at CIBC World Markets Inc., in a research note.

Provisions for credit losses – the money set aside to cover bad loans – rose to $70-million in the fourth quarter, from $59-million a year ago. But the increase effectively belonged to Credigy Ltd., a U.S. subsidiary that specializes on buying distressed loans at discounted prices.

The bank expects Credigy will continue to grow, but is tapering its appetite for unsecured consumer debt as it winds down an agreement that saw the firm buy $1.3-billion in prime loans from Lending Club, a U.S.-based online lending firm. Credigy will instead look at doing more deals for secured loans with lower spreads but also lower losses.

National Bank reported profit of $525-million, or $1.39 per share for the fourth quarter, compared with $307-million, or 78 cents a share, in the same quarter a year ago.

Adjusted to exclude one-time items, the bank earned $1.40 a share – two cents ahead of expectations among analysts polled by Bloomberg LP – and profit was up 15 per cent.

For the full year, the bank reported $2-billion in profit, or $5.38 a share, a sharp improvement from a year earlier.