Réal Raymond is excited about the future. The president and CEO of Montreal-based National Bank of Canada sees great days ahead for Canada’s sixth-largest bank, both in terms of organic growth and the opportunities that could come when bank mergers are allowed.

But Raymond doesn’t see National Bank as simply Canada’s sixth-largest bank. He sees it as a super-regional bank and an important player nationally in financial market activities and wealth management.

Nor is he waiting for bank mergers to arrive. He recognizes that, at this point in time, mergers are a tough sell politically. Instead, the 150-year-old bank is moving forward on its strategy of leveraging its brand in Quebec and pursuing national niches in which it can create value.

Already, National Bank dominates the Quebec marketplace to a degree not achieved by any of the Big Five banks in any region. Mergers would provide National Bank — and other smaller banks — a rare opportunity to expand their personal and commercial banking activities into other regions.

Following a merger of two of the Big Five banks, competition issues would certainly require the sale of some branches. Increased competition would occur only if the branches were sold in blocks, says Raymond. If branches are sold piecemeal, the new competitors would have great difficulty establishing a permanent presence.

As the biggest of the smaller players, the well-capitalized National Bank would have an advantage in bidding for these branches.

But even without mergers, National Bank’s strategy appears to be working well already. Net income excluding unusual or non-recurring items was $804 million in the fiscal year ended Oct. 31, 2005, up 14.5% from $702 million in fiscal 2004. In the first quarter of fiscal 2006, it reported net income of $217 million, up 1.4% from $214 million in the same period a year earlier. Revenue was $979 million for the quarter, up 3.5% from the $946 million it amassed during the same period in 2005. Assets as of Jan. 31 were $105.3 billion, vs $91.7 billion a year earlier.

The bank’s 164.3 million common shares were trading around $63 a share in mid-April, up from $50 a share at the beginning of 2005. In an early March report, Catalyst Equity Research Inc. in Toronto increased its 12-month target to $67 from $65. The change is based mainly on expectations of a repurchase of eight million shares and an increase in the annual dividend to $2.20 from $1.92. Earnings estimates consolidator Thomson/First Call Research has a mean share price target of $68.18 a share and a median of $68, with a high of $72 and low of $62.

Here is a closer look at what the National Bank has done, is currently doing and what it plans to do in its niches.

> Personal and commercial banking. This is the bank’s bread and butter, especially in Quebec, where it has a 38% share of the commercial banking market and a 34% share of the personal banking market among the chartered banks. “We have a lot of staying power and the ability to leverage on the brand,” says Raymond.

National Bank’s main competition is Groupe Desjardins — which, through its caisses populaires, has a bigger share of the personal and small commercial loans (less than $1 million each) market, but only a quarter as much as National Bank’s share of the $5-million-plus commercial-loan sector.

National Bank is also putting a lot of effort into developing the “sales culture” at its branches. Raymond admits this isn’t easy; training and financial incentives don’t necessarily turn employees into salespeople.

On the personal banking side, the bank’s solution has been to use those employees who don’t take to sales as personal bankers, and hire new employees to boost the numbers of those expected to sell.

Even though customer retention has increased with the introduction of personal bankers, Raymond admits that getting the system to work well can be challenging. He explains that it isn’t always enough for personal bankers to call the customers and request a meeting for the next time the customer visits the branch. Sometimes, home visits may be required and personal bankers may not want to make these trips because they don’t have the incentive of those whose mission it is to sell products.

@page_break@On the commercial side, National Bank’s history in the province gives it a huge advantage over the Big Five. It knows everything about its clients — directors, management, company histories, succession plans and family stories. As well, it has had a lot of success with two recent initiatives in this area. One was contacting the 20% of commercial customers who don’t have loans at the bank. A team of 20 to 25 employees was put in place to call on these clients, and the result was a big increase in deposits as customers consolidated their deposits at National Bank. “No one had ever called on them,” says Raymond.

> Investment banking and related financial market activities. National Bank’s full-service brokerage subsidiary, National Bank Financial Ltd. , has seen great success in the financial markets, ranking up with the brokerage subsidiaries of the Big Five in areas such as research ratings. It also has significant market share in equity and fixed-income issues and in mergers and acquisitions. Its share of total Canadian equity issues increased to 8.7% in 2002 from 4.2% in 2000 and has stayed in the 7%-7.9% range since then. Of the bank-owned brokerages, its share of equity issues has been in the 11%-13% range.

National Bank Financial was created in September 1999, when National Bank acquired institutional boutique First Marathon Inc. and then merged it with the bank’s wholly owned investment dealer, Lévesque Beaubien Geoffrion Inc. The timing was just right for the merger, says Raymond: “The market wanted an alternative, so there was room for us.”

National Bank Financial focuses on the mid-cap market, which, Raymond notes, is very big in Canada. It has also been very active in oil and gas income trusts. “It’s a very nice niche for us,” he says. “We’ve been in oil and gas a long time, since our takeover of Mercantile Bank in 1985. We’re well known in the sector.”

> Wealth management. National Bank’s share of personal finance wallets in Quebec was 42% last October, vs 29% three years earlier. During that time, it has increased the average number of products sold to high net-worth clients to 6.4 from 5.8; and for all customers, to 4.3 from 3.7.

“This is a great area for us. There still [will be] a lot of organic growth in the next five years as the population ages,” says Raymond.

National Bank Financial doesn’t have the same brand recognition nationally at the retail level as it has in Quebec. “For serious growth, we need an acquisition — for scale and leverage,” says Raymond. The bank is looking for a good fit, in terms of culture.

In the meantime, National Bank does have national brand recognition in the mutual fund marketplace with Altamira Investment Services Inc. , which it acquired in 2002.

Although turning Altamira around took more time and more senior-management changes than expected, the process has been completed, says Raymond. Altamira’s investment philosophy has been changed to one that focuses on core products and providing consistent returns, which required changes in mandates and portfolio managers.

The bank also introduced a sales culture at Altamira, says Raymond. Besides direct-to-consumer call-centre sales — which was its main source of sales before it was acquired — Altamira products are now sold in National Bank branches and through independent financial advisors.

It may, however, take longer than Raymond suggests for Altamira to return to robust health. Even with excellent performance in 2005, Altamira still reported net redemptions in long-term funds of $105 million this 2005-06 RRSP season and $29 million in April. Advisors and investors alike want to see good three-year returns before they buy.

Nevertheless, Raymond says, Altamira is set for strong growth. Investment performance has turned around and, assuming that continues, Altamira’s brand recognition should result in strong sales. Although it’s only the 15th-largest mutual fund family, with $3.9 billion in assets under management as of Feb. 28, National Bank research shows Altamira is among the top four best-known brands, says Raymond.

In addition to Altamira, the bank’s wholly owned mutual fund subsidiary, National Bank Securities Inc. , offers mutual funds. Although performance of those funds has been poor for the past three years, they did tally $277 million in net sales, excluding money market funds, during the recent RRSP season, bringing AUM to $7.3 billion — almost double that of Altamira’s.

Martin Lavigne, senior vice president of sales and products at National Bank Securities, believes one reason for the continued sales is that performance of the funds improves significantly when they are combined in portfolio products, a major focus for National Bank Securities.

In addition to developing these brands, National Bank has also adopted some other strategies to increase its wealth-management component. One is selling investment products to commercial customers — which extends a presumably good relationship that already exists. Financial planners were put into the branches, and both they and the commercial lenders were given financial incentives based on net assets acquired. The incentives are key to the success of this. “[The trick is] to figure out what you want, and pay accordingly,” says Raymond.

Another strategy that is going well is National Bank’s partnership program, under which the bank sells branded or white-label banking products, including investment loans. National Bank has about 15 such partners, including Power Financial Corp. ’s life insurance subsidiaries and Investors Group Inc. (see page 22). This is a strategy that’s ideal for a regional bank rather than a national one, because there is no risk of cannibalizing existing business. This means that with few National Bank retail customers outside of Quebec, everyone who buys one of its banking services through the partnerships is a new customer. “We can grow without spending much, except on technology,” says Raymond.

Laurentian Bank of Canada is also in this niche through its B2B Trust subsidiary; but CIBC is the only one of the Big Five selling white-label products, with its Amicus subsidiary providing banking products for Loblaw Companies Ltd. CIBC isn’t targeting the financial services sector.

> Insurance. National Bank has both life and property and casualty insurance subsidiaries, with the latter being the larger.

With 80,000 customers, it is the third-largest P&C direct insurer in the province. This business was built from scratch in a 50/50 partnership with AXA Group of France. The two started with auto insurance, but recently added home insurance.

National Bank has also been focusing on the life insurance market recently. Through its life subsidiary, it has introduced new products for individuals, such as the $10,000 55+ life insurance policy with no medical requirement and premiums based on age. It is also gearing up to become a major player in the group insurance segment and has set up a specialized team to offer group life, disability, health and dental insurance solutions.

Like the other banks, National Bank is lobbying the federal government to allow the sale of insurance products in its branches (see page 24). As a first step, it wants permission to provide information about insurance at all its locations. IE