A sign is pictured outside a National Bank of Canada branch in Ottawa.CHRIS WATTIE/Reuters
National Bank of Canada reported a 6-per-cent gain in its quarterly profit, but higher expenses and challenging operating conditions weighed on its share price.
The bank, the smallest of Canada's Big Six and the last to report fiscal third-quarter results, said its profit rose to $478-million in the May-to-July period, up from $453-million last year. A decline in the amount of money set aside to cover soured loans eased concerns about the bank's energy exposure two years into a slump in oil prices.
However, National Bank's shares slumped 3.1 per cent on Wednesday after a number of analysts expressed disappointment over the lender's profit growth in core businesses such as retail banking and wealth management. The decline ends a winning streak for commercial banks that began when the largest five banks reported a string of unexpectedly strong results.
"All of our businesses are performing well. Our transformation to a more digital and efficient organization is accelerating and producing tangible results," Louis Vachon, National Bank's chief executive officer, said during a conference call with analysts.
National Bank said that its adjusted profit was $486-million, or $1.33 a share, after accounting for some one-time items, which beat analysts' expectations.
But some analysts quibbled with how the Montreal-based lender adjusted its earnings to account for one-time gains, including a revaluation of its investment in Cambodia-based ABA Bank. Excluding this gain would lower National Bank's adjusted profit to $1.21 a share, according to Darko Mihelic, an analyst at RBC Dominion Securities – or down 3 per cent from last year.
While National Bank's personal and commercial banking division and wealth division each reported a 5-per-cent gain in profit, bank-wide expenses jumped 7 per cent quarter-over-quarter and payrolls expanded by 140 positions in Canada. These gains stood out from signs of tight cost controls and payroll reductions at other banks. In the third quarter, the bank set aside $45-million to cover soured loans, an improvement from $67-million last quarter.
The results follow a tumultuous year for National Bank. Over the past 12 months, it has taken a full writedown on its $165-million investment in Maple Financial Group, raised $300-million in a share issue to bolster capital levels and announced an $85-million restructuring charge related to layoffs.
Last quarter, it set aside $250-million as a sectoral provision against bad loans to the energy sector, adding to worries that the lender has a worrisome exposure to the sector.
However, the lender has been reducing its exposure in recent months. Its loans to energy companies now total just more than $2.5-billion, or 2 per cent of its entire loan book. That's down from $2.9-billion or 2.4 per cent of its loan book last quarter.
William Bonnell, executive vice-president of risk management, said the bank's direct exposure to oil and gas producers and oil-field services, in terms of total commitments, has fallen by about 30 per cent year-over-year.
"The more favourable market environment allowed our producers and services clients to raise additional capital and spur increased mergers and acquisitions activity, which led to further reductions in bank facilities," Mr. Bonnell said during the call with analysts.
The reduction has raised the share of loans that are considered investment grade. Now, 46 per cent of loans to producers are investment grade, up from 40 per cent last quarter.
Mr. Vachon added that the size of the oil and gas loan portfolio is now about as small as the bank would like it to go, given that companies are looking to take advantage of the downturn in the commodities cycle.
"We have started to deploy capital to some of these players. Over the next few months, we expect that … the balances in the oil and gas book should start growing again," Mr. Vachon said.
John Aiken, an analyst at Barclays, raised his target price on National Bank shares, to $47 from $45, after the release of third-quarter results.
"We believe that National has put its energy and capital issues behind itself and, as the market realizes that its incremental risk has diminished, we would expect to see its relative discount to narrow," Mr. Aiken said in a note to clients.
National Bank of Canada (NA)
Close: $46.09, down $1.49
Laurentian profit rises
Laurentian Bank of Canada reported third-quarter adjusted net income of $46.1-million or $1.37 a share, compared with $45.3-million or $1.48 a share for the same period in 2015.
Net income totalled $45.1-million or $1.34 a share for the third quarter of 2016, compared with net income of $44.2-million or $1.44 for the same period last year.
Total revenue increased 1 per cent to $229.1-million compared with $226.6-million a year earlier, driven by growth in other income, the company said in a release.
Its provision for credit losses increased to $8.2-million for the third quarter from $7-million for the third quarter of 2015.
"This low level of credit losses continues to reflect the overall underlying good quality of the loan portfolios," the bank said.
BRENDA BOUW
Special to The Globe and Mail
David Berman