08/28/2013 10:44 EDT | Updated 10/28/2013 05:12 EDT

National Bank unphased that volatile Quebec unemployment will hurt loan losses

MONTREAL - National Bank says it is not worried that recent employment volatility in Quebec will accelerate losses on its personal, mortgage and commercial loans.

CEO Louis Vachon characterized the province as a no boom, no bust economy, where loan losses have been lower than the national average for more than a decade.

"Looking from where we see in our portfolio right now and even looking forward for the next few years I think the odds continue to be quite high that our loan portfolio will continue to outperform the industry average going forward," Vachon said Wednesday during a conference call to discuss the bank's strong third-quarter results.

The bank has protected itself by focusing more on secured loans. Lower home prices also mean smaller mortgages and a stronger prevalence of renters result in Quebec residents being less indebted than in the rest of the country.

A recent Ipsos-Reid survey found that Quebec's average debt to income ratio was 1.1, compared with a national average of 1.36.

The Montreal-based bank beat expectations as a strong performance across its business contributed to record adjusted profits in the quarter. It earned $419 million or $2.39 per diluted share in net income in the latest period, up from $379 million or $2.14 in the same period last year.

Revenue rose five per cent to $1.29 billion from $1.22 billion.

Excluding one-items, the bank earned a record $391 million or $2.22 per diluted share, up 11 per cent from $353 million or $1.98 per share in the same 2012 period.

Income attributable to shareholders increased 11 per cent to $401 million while adjusted profits was $373 million.

National Bank (TSX:NA) was expected to earn $2.06 per share in adjusted profits on $1.3 billion in revenues in the third quarter, according to analysts polled by Thomson Reuters.

William Bonnell, head of the bank's risk management, said key indicators including probability of default remain very solid despite the volatile unemployment numbers.

Canada's weak job market in July led to a net loss of 39,400 jobs, including 30,400 in Quebec. The drop lifted the national unemployment up one-tenth a point rate to 7.2 per cent, but Quebec's unemployment rate was 8.2 per cent, up from 7.9 per cent in June.

While the unemployment rate could affect mortgages, credit cards and personal loans, factors are positive for commercial loans, added Vachon.

"Commercial deposits are growing faster than commercial loans so it's not the type of environment that suggests a major credit blow up is imminent, quite the opposite actually."

The personal and commercial banking group benefited from strong volume growth while the bank said a new approach to approving mortgages is beginning to bear fruit.

The changes implemented across Quebec allow for mortgages to be approved in one meeting with customers, cutting costs by saving employee time. National Bank is also increasing cross-selling efforts for its credit cards, lines of credit and insurance.

The effort will soon be expanded to branches across Canada, along with its mobile service and call centres.

Analyst John Aiken of Barclays called the bank's results "very impressive" and enough to get the country's six-largest bank some respect.

"We would characterize National's results as a very strong quarter," he wrote in a report.

The bank benefited from strong trading revenues, but the results were "arguably better" than what Bank of Montreal (TSX:BMO) and Scotiabank (TSX:BNS) posted on Monday, Aiken said.

"Even if one does not give National Bank a full credit for trading, which the market rarely does, the results still came in well ahead of expectations. We note that National is trading at the lowest multiple of the group and should finally get some respect with these earnings."

National Bank maintained its dividend at 87 cents per share, but Aiken said a hike is likely next quarter based on the strength of the bank's results.

The bank said its Tier 1 capital ratio was 8.6 per cent, up from 7.3 per cent as of Oct. 31, 2012. Return on equity was 21.9 per cent, or 20.3 per cent excluding one-time items.

Earlier this month, it signed a deal to pay $250 million for TD Waterhouse Institutional Services, which will provide back-office and support solutions for portfolio managers and brokers across the country.

The agreement, which is expected to close later this year, is expected to add 12 cents per share annual earnings in 2014, and 14 cents the year after.

On the Toronto Stock Exchange, National Bank's shares hit a new 52-week high of $81.64 in intraday trading, before closing up $1.89 at $81.14.