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National Bank Goes West Amid Revival of Oil-Patch Deals

The National Bank of Canada Headquarters Sits in Montreal
The National Bank of Canada logo is displayed outside of the company's headquarters in Montreal, Quebec. Photographer: Brent Lewin/Bloomberg

National Bank of Canada is holding its annual meeting in Calgary for the first time as the lender’s decades-long quest to diversify beyond its home province of Quebec gains traction.

Under Chief Executive Officer Louis Vachon, the Montreal-based bank has increased its wealth-management business through takeovers, bolstered energy investment banking in Western Canada and won more mandates in corporate lending while leading its rivals in per-share profit growth.

“National is looking at growing from being a super-regional bank to having much more of a national presence,” Kash Pashootan, a portfolio manager with First Avenue Advisory of Raymond James Ltd., said in a March 24 interview. “There is a significant growth opportunity, if implemented properly, for National to grow across Canada, and really where they’re targeting is Calgary.”

The April 10 meeting in Alberta is just the second time National Bank has held the gathering outside Quebec and the first in an English-speaking province. Last year’s event was in Moncton, New Brunswick, Quebec’s bilingual provincial neighbor.

The company’s roots go back to 1859 when francophone businessmen in Quebec City established Banque Nationale. The lender became Bank Canadian National after a 1924 merger with a competitor, and by 1979 had combined with Provincial Bank to become National Bank of Canada.

Quebec Anchor

National Bank’s main business has been consumer lending in Quebec, a province whose economic growth lags behind that of Western Canada. Of the bank’s 451 branches, 339 are in Quebec, 74 are in Ontario and 27 are in New Brunswick. Nine branches are west of Ontario.

The country’s sixth-largest lender by assets extended its retail banking reach through a 2002 agreement with Power Financial Corp.’s Investors Group, Great-West Life and London Life units. The deal allowed it to offer loans, credit lines, deposit accounts and credit cards through those companies’ networks.

“National’s presence in personal and commercial banking anchors them in Quebec, but that province has never been the highest growth part of the country,” Sumit Malhotra, a Scotia Capital analyst, said in a March 24 interview. “The logic for looking to diversify outside of Quebec is pretty clear, with diversification more from wealth management and wholesale banking.”

Profit Growth

Personal and commercial banking accounted for 43 percent of National Bank’s adjusted profit in the fiscal first quarter, compared with 37 percent for its financial markets unit and 20 percent from wealth management, according to financial statements.

Two-thirds of National Bank’s credit portfolio is in Quebec, with 19 percent in Ontario and 15 percent from the rest of Canada as of Jan. 31, the company said during a Feb. 25 conference call.

National Bank per-share profit growth is the highest of Canada’s six largest lenders since the 2008 financial crisis, with a compound annual growth rate of 42 percent, according to data compiled by Bloomberg. That’s almost four times as much as Toronto-Dominion Bank and Royal Bank of Canada, the nation’s two largest lenders, and five times that of Bank of Montreal.

Wealth Management

National Bank shares have advanced 0.2 percent this year, trailing the 1.7 percent return of the eight-company Standard & Poor’s/TSX Commercial Banks Index. The bank rose 1.3 percent to C$44.89 by the close of trading in Toronto today.

Quebec is in the midst of a provincial election campaign, with a poll last week showing the Liberal Party increasing its lead over the separatist Parti Quebecois and may be on track to form a majority government in the April 7 election.

“I like this stock because I do have confidence in their ability to execute this strategy,” said Pashootan, whose Ottawa-based firm manages C$200 million ($181 million) including National Bank shares. “I look at the growth strategy and compare it to the current discount that the stock is trading at, and it’s attractive.”

National Bank has ramped up expansion in wealth management in the past three years, acquiring the Canadian investment-advisory businesses of HSBC Holdings Plc and Winnipeg-based Wellington West Holdings Inc. In November, the bank bought Toronto-Dominion Bank’s institutional-services business.

‘Slow, Steady’

The bank is “very close” to its goal of earning at least half of wealth revenue from outside Quebec, said Claude Breton, a spokesman for the firm. That’s up from 45 percent in 2007.

The lender has made inroads in investment banking through its National Bank Financial Markets unit. National Bank gets a greater share of revenue from underwriting and advisory fees -- 5.6 percent of its C$5.36 billion in revenue last year -- than its five larger peers.

Earlier efforts by National Bank to expand beyond its base “met with failure consistently,” said John Turley-Ewart, who has a PhD from the University of Toronto with a focus on Canadian banking history.

“National Bank has been trying for a couple of decades now to diversify and move, and they haven’t succeeded,” Turley-Ewart, a former National Bank employee, said in a telephone interview. “It is the right strategy. They have to do it.”

National Bank plans a “slow, steady Pan-Canadian” expansion, while building on opportunities in Quebec, Vachon, 51, said in an October investor presentation for its capital markets business.

‘Calgary Meeting’

The lender’s decision to hold its annual meeting outside its home province was “client-driven,” Breton said.

“Clients have been requesting for a long time that we go meet them in their home town,” Breton said. “We acquired a lot of wealth-management outlets over recent years all over Western Canada, so we wanted to meet our clients there.”

National Bank made its first energy loan in Calgary in 1984, and a year later took over Mercantile Bank of Canada, which accelerated plans to expand in Ontario and Western Canada. In investment banking, the firm today competes with larger rivals for a greater share of deals amid a rebound in Canadian energy transactions.

Announced oil-and-gas takeovers involving Canadian companies amounted to $15.8 billion this year, almost triple the amount from a year earlier, according to data compiled by Bloomberg.

Whitecap Resources Inc. turned to National Bank to co-lead a C$500 million share sale to help finance its March 17 agreement to buy Western Canadian oil and natural gas assets from Imperial Oil Ltd. It’s the second-largest stock sale in Canada this year. National Bank ranked eighth among firms advising on Canadian equity financings in the first quarter. The firm was 10th for all of last year.

Municipal Lending

“National has been very aggressive at lending in the oil patch, which is one of the stronger areas of capital markets activity in Canada,” Scotiabank’s Malhotra said. “Energy plays a big role when you look at their growth in corporate lending and commercial lending.”

National has been the top arranger of debt for Canadian provinces, municipalities and government agencies twice in the past three years, winning more mandates from outside Quebec. The lender arranged debt deals for British Columbia, Alberta, Saskatchewan and Ontario last year.

The bank’s strategy has won over investors like Pashootan.

“National Bank has grown through loan-growth acceleration, they’ve maximized the key markets that they’re in,” Pashootan said. “I don’t see any reason why they can’t continue to expand as a Canadian publicly traded bank into other parts of Canada.”

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