National Bank of Canada NA-T reported higher second-quarter profit that beat analysts’ estimates on a boost from its capital markets division, even as the lender set aside more money for loans that could default.
The Montreal-based bank is the third major Canadian lender to exceed analysts’ expectations for the second quarter ended April 30, benefiting from higher revenue in global markets and from corporate and investment banking services. National Bank followed its peers in increasing provisions for credit losses – the funds banks set aside for loans at risk of defaulting – as consumers and businesses struggle to manage the higher cost of borrowing.
“While it could not escape the deterioration in credit that has been a theme of the second quarter, its provisions were not materially higher than expectations and were offset by strong revenue growth and solid cost controls,” Jefferies analyst John Aiken said in a note to clients.
National Bank’s profit climbed 9 per cent to $906-million, or $2.54 a share, compared with the same period last year. On an adjusted basis, the bank said it earned $2.54 a share, topping the $2.42 a share analysts expected, according to S&P Capital IQ.
Capital markets profit rose 20 per cent to $322-million on higher revenues from equities and from interest-rate and credit activities.
National Bank is the fourth Big Six bank to report earnings for the second quarter. Bank of Montreal BMO-T also reported earnings Wednesday, posting a profit that fell below analysts’ expectations. Toronto-Dominion Bank TD-T and Bank of Nova Scotia BNS-T posted second-quarter results that beat analysts’ estimates. Royal Bank of Canada RY-T and Canadian Imperial Bank of Commerce CM-T report on Thursday.
As higher interest rates hike borrowing costs, banks have ramped up their provisions in anticipation of possible loan defaults.
In the quarter, National Bank set aside $138-million in provisions for credit losses. That was higher than analysts anticipated, and included $114-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 had set aside $85-million in provisions.
“Looking at the Canadian economy, it continues to show signs of deceleration,” National Bank chief executive officer Laurent Ferreira said during a conference call with analysts. “Interest rates have been holding year-to-date, and housing and rental costs remain high. As core inflation has eased in recent months, we believe the Bank of Canada may now be in a position to offer some interest-rate relief in the second half of the year.”
Total revenue rose 12 per cent in the quarter, to $2.75-billion. But expenses increased 8 per cent to $2.84-billion, which the bank said was driven by higher salary and benefits costs.
Profit from Canadian personal and small-business banking was $311-million, down 3 per cent from a year earlier, as higher non-interest expenses and provisions offset an increase in revenue.
The wealth-management division generated $205-million in profit, up 15 per cent as a boost in net interest income was driven by higher interest rates.
Profit from the bank’s U.S. specialty financial and international arm – which includes subsidiaries Credigy Ltd. and Cambodia-based ABA Bank – rose 27 per cent to $163-million.