Source: The Canadian Press

The National Bank of Canada plans to target its expansion outside Quebec on the clusters of areas and commercial industries it already serves, rather than undertaking a wholesale addition of new branches, bank president Louis Vachon said Friday.

The Montreal-based bank has focused over the past few years of building its personal and commercial banking in geographic clusters in Ontario and New Brunswick, and working with third-party distributors in areas where it isn’t as well entrenched.

It has also had commercial lending success in the oil and gas sector and niche agricultural business. But there are a few more niches it could explore, Vachon said during a conference call.

“That’s the more likely avenue of expansion for personal and commercial banking outside of Quebec right now than a full-fledged offensive to open up 200 branches right across Canada over the next 48 months.”

National Bank (TSX:NA) has completed the first phase of its strategy to increase sales from existing customers. Boosting its sales force by about 10%, or 300 workers, has begun to bear fruit.

In the second quarter, loan volumes grew by 8%, surpassing the performance its major Quebec rival, the Desjardins Group.

The next phase will deploy a new IT program, particularly in Quebec.

The full benefits of its efforts to add new branches and increase cross-selling to existing customers should bloom in 2011 and 2012.

National Bank earned $261 million in the quarter ended April 30, up from $241 million a year ago.

The profit amounted to $1.50 per diluted share, compared to $1.41 per share a year earlier when it took a $20 million in after-tax charges related to asset-backed commercial paper.

The average analyst estimate had been for earnings of $1.46 per diluted share, according to Thomson Reuters.

Revenue was $1.05 billion, up from $1.03 billion.

Return on equity was 18%, down from 18.5% a year ago.

National Bank said it took advantage of the economic recovery in its Quebec base to slightly expand its market share through “solid loan volume growth.”

“While taking advantage from favourable market conditions, we are starting to see some momentum coming from the ‘one client one bank’ initiative,” Vachon told analysts.

The bank said earnings from its personal and commercial segment rose 23% to $141 million for the quarter fuelled by a solid increase in personal and commercial loans.

The wealth management business earned $28 million in the quarter, down from $30 million a year ago, while National Bank’s financial markets business earned $125 million, up $3 million from the same quarter of 2009.

National said it had $69 million of exposure to banking and sovereign risk in Portugal, Ireland, Italy, Spain and Greece — the countries that face the highest debt risk.

Meanwhile, the bank said uncertainty over new rules on regulated capital requirements has forced it not to increase its dividend or activate its share buy back program before the fourth quarter.

John Aiken of Barclays Capital said National Bank’s results were favourable compared to three of its Toronto peers that missed expectations Thursday.

“Despite sequential declines in core revenues, National was able to generate modestly positive operating leverage in the quarter on the back of very strong cost containment,” he wrote in a research note.’

“Should these expense levels be maintained it bodes well for incremental earnings as revenue growth resumes in future quarters.”

While it has the capacity to increase its dividend, Aiken said the bank will remain cautious and possibly wait until one of its peers move first.

Shares in National Bank fell 36 cents to $57.71 in afternoon trading on the Toronto Stock Exchange.