National Bank of Canada posted profits that exceeded analysts’ expectations Wednesday, a week ahead of a key vote on the country’s sixth-largest bank’s proposed $5-billion takeover of rival Canadian Western Bank.
Montreal-based National Bank earned $1.03-billion in profit or $2.89 per share in the third quarter, up 24 per cent from $2.33 in the prior year.
The bank’s adjusted earnings per share, which removes certain items, was $2.68 in the three months ending July 31, well ahead of the $2.47 estimate from analysts. It was the fourth consecutive quarter National Bank’s financial results exceeded expectations. The bank’s share price closed up $7.02 or 5.86 per cent to $126.91 on the Toronto Stock Exchange on Wednesday, hitting a record high, and is now up 27 per cent over the past 12 months.
A breakdown of the big Canadian banks’ third-quarter earnings
The bank said strong performance from all its business contributed to the increase in earnings. National Bank put more of its capital to work by making more loans to clients, while also setting more money aside in reserves for bad debts.
The bank’s loan portfolio grew by 9 per cent compared with the same period a year ago, to $240-billion. Commercial lending rose by 16 per cent, year-over-year, while personal loans grew by 4 per cent.
Provisions for credit losses were $149-million compared with $111-million in the same quarter last year and $138-million in the previous quarter.
National Bank’s wealth management division earned $217-million in the quarter, up 19 per cent from the same period last year, while its capital markets unit posted a $318-million profit, up 55 per cent.
Interest rates soared over the past two years and lenders such as National Bank are now renewing homeowners’ mortgages at rates that are often far higher than what they had previously paid. Analysts have flagged the risk of higher borrowing costs triggering a spike in mortgage defaults.
However, National Bank executives said homeowners continue to pay down their mortgages. Executive vice-president for risk management William Bonnell said in a call with analysts the bank has renewed 60 per cent of its mortgage portfolio at higher rates and defaults continue to be below prepandemic levels.
“National Bank continues to execute well, with the lift in earnings from retail and wealth not only offsetting pressures felt in other segments but, in our view, enhancing the quality of its earnings,” said analyst John Aiken at Jefferies Securities Inc. “With the Canadian Western shareholder vote next week, there appears to be few impediments to the deal being completed.”
The stronger-than-expected financial results come as National Bank looks to win regulatory and shareholder approval for its proposed takeover of Edmonton-based Canadian Western. The transaction, announced in June, would dramatically increase National Bank’s presence in Alberta and B.C.
National Bank plans to pay for its rival, the country’s eight-largest lender, by exchanging its own shares with those held by the Alberta-based bank’s shareholders. The proposed deal will see Canadian Western share swapped for 0.45 of a National Bank common share.
Canadian Western shareholders are scheduled to vote on the all-stock offer on Tuesday. To move forward, the deal requires the approval of two-thirds of the Alberta-based bank’s shareholders.
If the transaction clears all hurdles, National Bank expects it to close by the end of next year. In an analyst call on Wednesday, National Bank chief executive office Laurent Ferreira said the bank is already working on winning approvals from regulators, including the Office of the Superintendent of Financial Institutions and the federal Competition Bureau, and “things are progressing well.”
National Bank is attempting to win new clients outside its home province in a highly competitive domestic market dominated by the six biggest banks. Canadian Western has $37-billion in loans across 65,000 customers and 39 branches. The deal would increase National Bank’s Canadian lending portfolio outside of Quebec by 37 per cent.