August 28, 2013 / 2:50 PM / in 4 years

UPDATE 2-National Bank of Canada stock surges on profit beat

* Strong trading, wealth management income drive profit

* Shares up 2.7 percent on results, hit 2-year high (Adds comments from fund manager, bank CEO)

By Cameron French

TORONTO, Aug 28 (Reuters) - National Bank of Canada reported a stronger-than-expected 10.6 percent rise in quarterly profit on the back of higher wealth management and trading income, pushing its stock to a two-year high on Wednesday.

The shares of the country’s sixth-largest bank, the third Canadian lender to report results for the quarter, were up 2.7 percent at C$81.39 in Toronto, their highest since May 2011.

Net income rose to C$419 million ($398.84 million), or C$2.39 per share, in the third quarter ended July 31, from C$379 million, or C$2.14 per share, a year earlier.

Excluding a C$37 million reversal of income tax provisions, and other items, earnings rose to C$2.22 a share from C$1.98. That was well ahead of the profit of C$2.06 analysts expected, according to Thomson Reuters I/B/E/S.

The news follows market-beating results from larger rivals Bank of Montreal and Bank of Nova Scotia on Tuesday.

“The earnings are going really well right now ... Long term, banks are attractive,” said Jason Donville, chief executive of Donville Kent Asset Management Inc.

But while those banks topped estimates mainly because of strong domestic lending income, National benefited from its proportionally large financial markets division, which includes trading, investment banking, and other advisory services.

“The earnings beat was driven by trading revenues and fee income,” CIBC World Markets analyst Robert Sedran said in a research note.

Income from the financial markets arm jumped 42 percent to C$158 million, which the bank attributed mainly to higher trading revenue, while wealth management profit rose 33 percent to C$52 million.

The personal and commercial segment posted a slim gain of 2 percent to C$192 million as growth in personal loans barely offset the impact of narrowing interest margins, which have been under pressure across the sector as tight competition forced the banks to lend at cheap rates.

However, the rise of longer-term bond yields over the past few months has prompted Canadian banks to begin raising fixed-rate mortgages.

Speaking on a conference call, National Bank Chief Executive Louis Vachon said this should provide some relief from narrow margins going forward.

“A steeper yield curve is, I think, generally positive for (interest margins) and everything else to the extent that it’s a gradual, not a hugely volatile but a gradual, increase in interest rates,” he said.

Earlier this month, National announced plans to buy Toronto-Dominion Bank’s institutional services business for C$250 million and said the deal would boost earnings per share by 12 Canadian cents in 2014 and 14 Canadian cents in 2015.

Royal Bank of Canada and TD, the country’s two largest banks, as well as No. 5 lender Canadian Imperial Bank of Commerce, report results on Thursday.

$1 = $1.0505 Canadian Additional reporting by Euan Rocha and John Tilak. Editing by Andre Grenon

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