Canada’s Big Six Banks: Steady As She Goes

By David Dittman • December 25, 2012 • Canadian Edge Weekly

Concerns about a slowing Canadian housing market and rising debt levels among Canadian citizens are dragging on earnings growth for the Big Six banks in the Great White North. Provisions for credit losses inched up across the group, though overall credit quality remains sound. And Canadian banking is still providing a solid foundation for what remains one the strongest financial systems in the world.

Rates of growth moderated in the fourth quarter of fiscal 2012, which ended Oct. 31. And management teams sounded cautious notes on the Canadian economy as well as on conditions in the US and abroad. But those with significant south-of-the-border operations also noted signs of strength, and the bank with the most overseas exposure benefitted in a big way from that competitive advantage in the recently concluded period.

Dividend growth was limited to a single bank. But in this environment holding steady is good news, too.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS), our favorite among Canada’s Big Six banks, wound up fiscal 2012 fourth-quarter reporting season for the group by posting a 31 percent increase in net income to CAD1.52 billion, or CAD1.18 per share. Scotiabank earned CAD1.16 billion, or CAD0.97 per share, in the year-ago quarter.

Adjusted earnings were CAD1.21 per share, beating a consensus forecast of CAD1.18 per share. Revenue rose 15 percent to CAD4.94 billion on acquisitions and improved fixed-income trading performance. Provisions for credit losses rose to CAD321 million from CAD281 million.

Scotiabank is the most global of the Big Six, with its growth initiatives concentrated in Latin America and emerging Asia.

Scotiabank’s Canadian banking division earned CAD481 million, up 15 percent from a year earlier, while international banking profits rose 22 percent to CAD453 million, driven by acquisitions, particularly Banco Colpatria in Colombia.

Global wealth management earnings rose 15 percent to CAD300 million, while the capital-markets business, known as global banking and markets, earned CAD396 million, up 63 percent from a year ago when market conditions were weak.

For fiscal 2012 Scotiabank posted net income of CAD6.47 billion, up 21 percent to establish a new company record. Earnings per share were CAD5.22, up 15.2 percent from CAD4.53 in fiscal 2011. Adjusted EPS were up 8 percent. Return on equity for the year was 19.7 percent versus 20.3 percent in fiscal 2011, while Scotiabank’s productivity ratio declined to 52 percent from 53.9 percent.

Scotiabank, the third-largest by market cap of the Big Six, reported a Tier 1 capital ratio of 13.6 percent as of Oct. 31, 2012, up from 12.2 percent at the same point in 2011. The bank’s tangible common equity ratio rose to 11.3 percent from 9.6 percent.

Scotiabank declared a fourth-quarter dividend of CAD0.57 per share, level with the third quarter payout but up from CAD0.52 a year ago. It paid dividends totaling CAD2.19 during calendar 2012, up 6.8 percent from calendar 2011.

Bank of Nova Scotia, which has generated a total return in US dollar terms of 21.8 percent in 2012, is yielding 3.9 percent as of Dec. 24. Management has raised the quarterly dividend three times since May 2011 for a total of 16.3 percent from CAD0.49 per share.

Royal Bank of Canada (TSX: RY, NYSE: RY) reported a 22 percent increase in net income to CAD1.91 billion, or CAD1.25 per share, as revenue grew 12 percent to CAD7.5 billion. RBC earned CAD1.57 billion, or CAD1.02 per share in the fourth quarter of fiscal 2011.

Like Scotiabank, the biggest of Canada’s Big Six banks experienced a solid recovery in fixed-income trading and saw additional gains from personal loan growth. Adjusted EPS, which includes amortization and other intangible items, were CAD1.27, better than the consensus estimate of CAD1.26.

Personal and commercial banking profit rose 9 percent to CAD1.03 billion. Personal loan and deposit growth rose 7 percent and 8 percent, respectively, from a year earlier, reflecting softer–yet still-healthy–housing demand and consumers’ appetite for debt.

Wealth management earnings increased 16 percent to CAD207 million and capital markets earnings more than tripled to CAD410 million. Trading revenue more than tripled to CAD625 million.

Provisions for loan losses in RBC’s Canadian banking group rose to 0.34 percent of total loans from 0.30 percent at the end of the third quarter of fiscal 2012. Total loan-loss provisions increased to CAD362 million from CAD276 million due to one corporate account and higher provisions in Canadian personal and business lending portfolios.

For fiscal 2012 RBC posted 17 percent profit growth to a company-record CAD7.5 billion, as personal and commercial banking, capital markets and insurance generated their best results ever.

As of Oct. 31 RBC’s Tier 1 capital ratio was 13.1 percent, up 10 basis points from the end of the third quarter.

RBC declared a dividend of CAD0.60 per share, equal to the CAD0.60 it paid Nov. 23 in respect of fiscal third-quarter results. The bank paid total dividends of CAD2.28 per share in calendar 2012, up 9.6 percent from CAD2.08 per share in calendar 2011.

RBC must refinance debt totaling CAD30 billion–approximately 36 percent of its CAD85 billion market capitalization–by the end of calendar 2014.

Royal Bank of Canada, currently yielding 4 percent, has boosted its quarterly payout three times since May 2011 for total dividend growth of 20 percent. RBC has posted a 2012 total return in US dollar terms of 24.2 percent.

Toronto-Dominion Bank (TSX: TD, NYSE: TD), Canada’s No. 2 bank by market cap behind RBC, reported fiscal 2012 fourth-quarter net income growth of 0.5 percent to CAD1.597 billion, or CAD1.66 per share, from CAD1.589 billion, or CAD1.68, a year earlier. Revenue grew 4 percent.

Adjusted EPS were CAD1.83, beating a consensus estimate of CAD1.81.

TD also announced it has agreed to buy Epoch Holding Corp, a New York-based asset management firm, for USD668 million in cash. TD’s growth efforts are focused on the US, where it now has more retail branches than it does in the Great White North.

The Epoch bid is the latest among several small acquisitions by TD since the 2008 financial crisis. In October it agreed to buy Target Corp’s (NYSE: TGT) USD5.9 billion US credit card portfolio.

TD has focused on small deals over the past two years, but CEO Ed Clark said during the bank’s quarterly conference call that it would consider larger deals to bulk up its already sizeable US presence. “We are seeing improvement in the US economy that makes larger deals more feasible,” Mr. Clark noted.

TD’s residential mortgage loans grew almost 9 percent from a year ago but fell 2 percent from the third quarter, reflecting tighter lending rules for borrowers using Canadian government-backed mortgage insurance.

For the full fiscal year TD posted EPS of CAD6.76, up from CAD6.43, on reported net income of CAD6.47 billion, up from CAD6.04 billion. Loan-loss provisions rose to CAD565 million from CAD404 million.

Canadian personal and commercial banking posted reported net income of CAD806 million in the fourth quarter on loan and deposit growth, while stable credit quality helped to drive core earnings growth. Wealth and insurance delivered net income of CAD293 million in the quarter, down 15 percent from the same period last year.

US personal and commercial banking generated net income of USD321 million for the quarter; on an adjusted basis the segment earned USD358 million, up 23 percent from the fourth quarter of fiscal 2011 on organic loan and deposit growth. Wholesale banking recorded net income of CAD309 million for the quarter, a year-over-year increase of 10 percent.

TD’s Tier 1 capital ratio was 12.6 percent at Oct. 31, up from 12.2 percent at the end of the third quarter.

TD declared a dividend of CAD0.77 per share, level with the rate paid for the third quarter. It paid CAD2.89 per share in calendar 2012, up 10.7 percent from the CAD2.61 paid to shareholders in 2011.

TD Bank is priced to pay 3.7 percent at these levels. The US-centric Canadian has raised its dividend four times over the past two years. TD has generated a 2012 total return in US dollar terms of 17 percent.

Bank of Montreal (TSX: BMO, NYSE: BMO) reported a 41 percent increase in fiscal 2012 fourth-quarter net income, as capital-markets profits more than doubled and loan-loss provisions came in well below year-earlier levels.

BMO earned CAD1.08 billion, or CAD1.59 per share, up from CAD768 million, or CAD1.11 per share, a year earlier. Adjusted EPS were up 35 percent to CAD1.65 per share, beating estimates of CAD1.43.

Net income from Canadian personal and commercial banking were flat at CAD439 million, while earnings in its US personal and commercial unit fell 16 percent to CAD130 million. Capital markets profit more than doubled to CAD293 million.

Loan-loss provisions fell to CAD192 million from CAD362 million. BMO’s Tier 1 Capital ratio ticked up to 12.6 percent from 12.4 percent at the end of the third quarter.

For fiscal 2012 net income surged 35 percent to CAD4.19 billion, while adjusted earnings grew 25 percent to CAD4.09 billion. Adjusted EPS were CAD6.00, up 18 percent from fiscal 2011.

Total provisions for credit losses were CAD765 million for the year, while adjusted provisions of CAD471 million were down CAD637 million from fiscal 2011.

BMO maintained its quarterly dividend at CAD0.72 per share. The bank paid dividends of CAD2.82 per share in calendar 2012, up from CAD2.80 a year ago.

Bank of Montreal is yielding 4.7 percent. BMO has been the most conservative of the Big Six as far as dividend policy is concerned, boosting just once since the end of the Great Recession. The bank has posted 2012 total return in US dollar terms of 17.8 percent.

Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) reported net income rose 13 percent to CAD852 million, or CAD2.02 a share, from CAD757 million, or CAD1.79, a year earlier. Adjusted earnings were CAD2.04 a share, above the CAD1.98 analysts expected and better than the CAD1.78 recorded for the fourth quarter of fiscal 2011.

For the year ended Oct. 31 CIBC reported net income of CAD3.3 billion, EPS of CAD7.85 and adjusted EPS of CAD8.07, compared to net income of CAD2.9 billion, EPS of CAD6.71 and adjusted EPS of CAD7.57 for fiscal 2011.

Retail and business banking posted net income of CAD2.3 billion in fiscal 2012, up from CAD2.2 billion in 2011 on volume growth across most retail products and higher fees.

Wealth management generated net income of CAD339 million, up from CAD279 million in fiscal 2011 on higher revenue in asset management. This was partially offset by lower retail brokerage revenue.

Wholesale banking delivered strong results, reporting net income of CAD613 million, compared with CAD543 million in 2011.

Provision for credit losses of CAD328 million was up CAD22 million from the fourth quarter of 2011. The bank reported a Tier 1 Capital ratio of 13.8 percent as of Oct. 31.

CIBC declared a dividend of CAD0.94 in respect of fourth-quarter results, in line with the CAD0.94 paid for the third quarter. The bank paid CAD3.64 per share in calendar 2012, up 3.7 percent from CAD3.51 in calendar 2011.

Canadian Imperial Bank of Commerce is now yielding 4.6 percent, with two dividend increases since August 2011.CIBC has generated a 2012 total return in US dollar terms of 18.6 percent.

National Bank of Canada (TSX: NA, OTC: NTIOF) is the smallest of the Big Six but it was the only one to raise its fourth-quarter dividend. National will pay CAD0.83 per share on Feb. 1, 2013, to shareholders of record as of Dec. 27, up from the CAD0.79 it paid for the third quarter of fiscal 2012.

The bank paid CAD3.08 per share in calendar 2012, up 12.4 percent from CAD2.74 in 2011. Indeed National Bank has been the most aggressive of the Big Six with regard to dividends since the end of the Great Recession, having been the first to raise its payout after the crisis abated.

The bank earned CAD351 million, or CAD1.97 a share, up 20 percent from CAD292 million, or CAD1.62, a year ago. Excluding items, adjusted earnings were CAD1.93, in line with analysts’ expectations.

For 2012 National Bank earned CAD1.63 billion, up 26 percent from CAD1.30 billion in 2011. EPS were CAD9.32 for 2012, up 35 percent from CAD6.92 in 2011. Adjusted net was CAD1.40 billion, up 7 percent, while adjusted EPS were CAD7.86, up 9 percent.

The bank’s Tier 1 Capital ratio declined to 12 percent from 13.6 percent a year ago. Provisions for loan losses declined to CAD190 million from CAD210 million a year ago.

The most Canada-centric of the Big Six, National Bank has also been the most aggressive dividend-raiser since the end of the Great Recession. It was the first to increase its payout and it’s been the most consistent about boosting its dividend in the quarters since. National Bank, which is paying 4.3 percent at current levels, has raised its dividend five times since November 2010, from a quarterly rate of CAD0.62 per share to the CAD0.83 it will pay on Feb. 1, 2013.

The smallest of the Big Six banks has posted a 2012 US-dollar total return of 14.7 percent.

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