National Bank of Canada

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National Bank of Canada

National Bank Tower
600 de la Gauchetiere West
Montreal, Quebec H3B 4L2
Canada
Telephone: (514) 394-5000
Toll Free: (800) 517-5455
Fax: (514) 394-8434
Web site: http://www.nbc.ca

Public Company
Founded: 1979
Employees: 16,890
Total Assets: CAD 107.52 billion ($91.4 billion) (2005)
Stock Exchanges: Toronto
Ticker Symbol: NB
NAIC: 522110 Commercial Banking

National Bank of Canada provides retail and commercial services through a branch system of over 450 locations, primarily in the province of Quebec. Insurance, trust, mutual funds, brokerage, investment counseling, lease financing, and services for institutional and high net worth clients are offered through its subsidiaries. Ranked behind its home country's largest banks, National Bank of Canada has turned to niche areas and third-party distribution channels for growth.

ROOTS IN MERGERS

National Bank of Canada traces its historical roots back to mid-19th-century Quebec. Founded and incorporated in 1859, Banque Nationale was "controlled by French-speaking businessmen and dedicated to promoting their interests," the bank's web site history recounted.

The operation would survive a fire and two economic crises during its first three decades. Then, the economic recession of the early 1920s forced a merger. Banque d'Hochelaga, a 50-year-old bank established in Montreal, paired with Banque Nationale in 1924 to form Bank Canadian National (BNC).

Five decades later, BNC participated in the largest financial sector merger in North America up to that time. Combined with The Provincial Bank of Canada, itself an outgrowth of a series of mergers, National Bank of Canada was formed in 1979. Six years later The Mercantile Bank of Canada was added to the fold.

National Bank of Canada's activities in the late 1980s included the establishment of National Bank Securities Inc. Formed in 1987, it provided discount brokerage, mutual fund, and immigrant investor services. In 1988 the bank acquired Levesque Beaubien, a brokerage firm, which merged with Geoffrion Leclerc the next year, forming Levesque Beaubien Geoffrion.

A CHANGE OF VIEW

Canadian banks had experienced lending losses from two sectors in the 1980s: the third world and the energy sector. In the early 1990s, another rash of losses hit the country's top six banks, among them National Bank of Canada, stemming from commercial real estate and highly leveraged transactions. According to American Banker, the banks collectively held a total of $10.2 billion in U.S. commercial real estate, largely in Manhattan on the East Coast and in Los Angeles and other California locales on the West.

The real estate portfolio deterioration foreshadowed increased loan loss provisions. This, coupled with a slowdown of domestic commercial and retail business and a narrowing of the difference between borrow and lend interest rates, flattened Canadian bank earnings.

The $35.6 billion-asset National Bank of Canada set up a commercial lending office in Buffalo, New York, toward the end of 1991, its emphasis on middle market companies with annual sales of $10 million-plus. The bank believed the upstate New York region's economic outlook was more favorable than the northeast or California, according to Business First of Buffalo. Beneficially, the city was situated closer to Canada and to its U.S.-based Canadian customers. The largest of its homeland competitors, The Royal Bank of Canada, had established an office in Buffalo about a year and a half earlier. Two other Canadian banks followed suit. National Bank of Canada already operated 15 U.S. offices, planned for more, and was considering acquiring U.S. retail banks.

During 1992, National Bank of Canada merged its National Bank Leasing Inc. subsidiary into its own operations. The following year GE Capital bought its lease financing operations. Also in 1993, the assets of General Trust of Canada, a 66-year-old trust specialist, were acquired. However, there were also significant lowlights marking the period.

"Andre Berard seems to have a knack for being the man on the spot when disaster strikes," Arthur Johnson reported for Canadian Business. "After taking over as CEO of the National Bank of Canada in 1989, Berard soon found himself dealing with high-profile corporate failures that left his bank holding huge problem loans—about $150 million to Robert Campeau and as much as $500 million to Olympia and York Developments Ltd. Could it happen again? 'Absolutely not,' declares Berard. 'There will never be another O & Y or Campeau. That size of transaction will not be permitted within the bank.'"

In the effort to avoid similar large-scale losses down the road, National Bank of Canada changed its game plan. The new representative office in Mexico City was concurrent with the move. The North American Free Trade Agreement (NAFTA) provided incentive for investment in the region, despite the inherent political turmoil of the day. National Bank of Canada already held a stake in a Chilean bank and expected to enter other countries as the reach of NAFTA broadened.

Referring to the Latin American moves, Berard told Canadian Business: "In any market we enter, the bank's strategy is to be a major player in commercial banking. We want to be a major force in financing the small and medium-sized businesses. That's true in Quebec, Ontario to some extent, and in the U.S., more so than any other Canadian bank."

National Bank of Canada maintained a profile as a full-service bank inside Quebec. Beyond those borders, the maximum lending limit had been reduced, in response to large losses generated outside the province. In addition, the bank intended to keep the number of consumer branches operated in other locales on the low side. A large Ontario expansion was just nearing the break-even point after about five years, finally overcoming slow-growth economic conditions of the province.

Subsidiary Natbank opened its first U.S. branch in Pompano Beach, Florida, during 1994. A second branch and head office opened in Hollywood, Florida, the following year. Another U.S. purchase, meanwhile, had already proved to be a good one.

To quickly build U.S. commercial business, in 1990 National Bank of Canada purchased the asset-based lending portfolio of the Bank of New England. By 1994, the company ranked fifth among the 30 major U.S. players in the niche, American Banker reported. The system, aided by computer programs, gave borrowers access to credit only when enough collateral was available to cover the loan.

COMPANY PERSPECTIVES

Our Vision: National Bank of Canada seeks to be recognized as a prosperous, efficient and progressive financial institution renowned for its leadership, innovation and service quality that builds on its position of strength in Quebec to continue its expansion elsewhere in Canada and in other select markets.

In 1996, National Bank of Canada and Metropolitan Life joined in the creation of National Bank Financial Services. The new entity would distribute both insurance and banking products. National Bank Life, launched in 1996, would serve as a coinsurer. The move anticipated regulatory changes expected to open up further opportunity for bank/insurer combinations. Previous government action allowed banks to enter the stock brokerage and, in a limited way, insurance businesses.

GLOBAL OUTLOOK

Canada's largest banks had loftier aspirations. While moving into the U.S. and other international markets, they claimed to be hampered by their inability to merge among themselves. Collectively a force to be reckoned with in Canada, they held about 60 percent of all personal loans, just under 50 percent of mortgage business, and about 25 percent of mutual fund assets, according to a 1997 Euromoney article. On a global level, however, the individual banks had less clout than larger Asian, American, and European banks. National Bank of Canada was the smallest among the six and the most regionally concentrated within Canada.

The big banks were strikingly similar in their game plan homeside, but abroad their tactics varied, ranging from retail banking joint ventures to trade finance and treasury services. The big banks were lobbying the Canadian government and citizens for the right to further consolidate the industry in order to create a Canadian bank large enough to compete toe-to-toe with the world banking powers. Over 35 years had passed since the last big Canadian bank merger, according to Euromoney. Both formal laws and informal policies blocked the way.

Along with Caisse de depot et placement du Quebec, in 1998, the bank formed lease financing company Alter Moneta. In 1999, National Bank of Canada acquired First Marathon. The Toronto-based brokerage firm then was merged with Levesque Beaubien Geoffrion to form National Bank Financial. The National Bank name was added to other subsidiaries in the next few years, as part of a brand standardization.

National Bank of Canada entered the U.S. investment banking market in 2002. The $75 billion-asset bank's subsidiary, National Bank Financial, purchased Putnam Lovell Group Inc. Faced with an equity market downturn, privately held Putnam needed to change strategy to continue to grow.

"I think we will use the Putnam platform to expand into other sectors," Lorie Haber, a National Bank Financial executive vice-president in corporate development told American Banker. "We intend to make other acquisitions in the States where we can create other opportunities." Also in 2002, the bank acquired Altamira, a leading mutual fund manager and distributor.

The moratorium on bigger banks continued into 2003 and 2004. Two merger attempts by the Big Five had been blocked, first in 1998 and then again in 2002. Meanwhile, as the international aspirations of larger competitors were blown about by political winds, National Bank of Canada concentrated on expanding its domestic business.

To do so the bank tapped the distribution channels of other institutions, including Investors Group, Great West Life, and Canada Life, instead of creating costly new systems, the Gazette (Montreal) reported. Altamira, a strong brand name in the area of wealth management, also provided an important channel for growth outside Quebec.

The strategy helped CEO Réal Raymond deliver earnings per share growth in the 21 to 22 percent range for the past three years, according to the National Post in March 2006. The return exceeded that of both the big five banks and the Toronto Stock Exchange five-year composite index. As far as some future merger among its giant competitors, Raymond envisioned corresponding opportunities to buy the divested assets of a new entity, required to sell off businesses to avoid market over-concentration.

National Bank of Canada continued to fine-tune business on several levels. As the credit side of banking diminished in importance, it had looked to fees and commissions from the financial services business to enhance its revenue stream. While eastern Canada's manufacturing sector slumped, the bank also looked to the flourishing western provinces with their energy and resource base for new commercial business.

Back on its home front, Quebec-based Caisse Desjardins was challenging National Bank of Canada. The bank cooperative ranked as the sixth largest Canadian bank by assets, according to a March 2006 Retail Banker International article.

KEY DATES

1979:: Megamerger creates National Bank of Canada.
1987:: National Bank Securities Inc. is founded.
1988:: Brokerage firm Levesque Beaubien is acquired.
1994:: Company opens first U.S. branch.
1996:: National Bank Financial Services is formed.
2002:: U.S.-based investment bank is acquired.
2005:: Third-party distribution channels drive growth outside Quebec.

Louis Vachon, head of National Bank Financial, was appointed chief operating officer in mid-2006, positioning him for an eventual move to the top spot. The action signified the increased importance of the investment side of the business, although retail and commercial lending continued to be core areas.

As for the Big Five, they resumed opening domestic branches after a six-year hiatus, moving away from international expansion to concentrate on the wealth management needs of an aging population. National Bank of Canada, though, viewed the country as by and large saturated with branch locations, a November 2006 International Herald Tribune article reported, and planned few new sites.

Kathleen Peippo

PRINCIPAL SUBSIDIARIES

National Bank General Insurance; National Bank Trust; National Bank Securities; Natbank; National Bank Financial; National Bank Direct Brokerage Inc.; Alter Moneta; National Bank Life Insurance Company; National Bank Insurance Firm; Natcan (75%).