Big Six Bank Earnings, Dividend Increases Impress

By David Dittman • March 19, 2013 • Canadian Edge Weekly

Four of Canada’s six largest banks announced dividend increases along with fiscal 2013 first-quarter numbers during the recently concluded earnings reporting season.

Toronto-Dominion Bank (TSX: TD, NYSE: TD), the second-largest of Canada’s Big Six with a market capitalization of CAD77.99 billion as of the close of trading on the Toronto Stock Exchange (TSX) on March 19, 2013, led the way with a 9.1 percent increase.

TD will pay CAD0.81 per share, up from CAD0.77, effective with the April 30 payment to shareholders of record as of April 3. Shares will trade ex-dividend as of April 1.

In March 2011 TD made its first post-Great Financial Crisis (GFC) dividend increase, going from the quarterly rate of CAD0.61 per share it had held for 10 quarters to CAD0.66. It has since raised four more times, settling back into a pattern of boosting its payout every other quarter.

Management reported adjusted earnings for the quarter of CAD1.9 billion, a 9 percent increase from a year ago.

Adjusted net income from TD’s domestic personal and commercial banking unit grew by 11 percent to CAD944 million on good loan- and deposit-volume growth, solid credit performance and the impact of cost-management efforts. Management expects the operating environment to “remain challenging.”

TD’s wealth and insurance unit posted 8 percent earnings growth to CAD377 million. Private-client income grew by 15 percent, driven by higher fee-based revenue due to a bigger base of assets, despite low trading volumes and the continuing impact of low interest rates. Insurance posted growth of 10 percent on lower weather-related claims and more premium revenue. TD Ameritrade earnings were CAD47 million, down 15 percent.

US personal and commercial banking operations generated adjusted earnings of USD387 million, up 12 percent over the prior corresponding period on strong organic growth in loans and deposits and securities gains. TD’s wholesale banking unit’s net income slid 18 percent to CAD159 million due to lower trading-related revenue from its fixed-income businesses, partly offset by better credit origination fees.

TD’s common equity Tier 1 ratio on a Basel III “all-in” basis was 8.8 percent.

Bank of Nova Scotia (TSX: BNS, NYSE: BNS), our top choice among Canada’s Big Six closed out fiscal 2013 first-quarter reporting season for the group by reporting a 13.2 percent increase in net income to CAD1.625 billion from CAD1.436 billion a year ago. Diluted earnings per share–or cash earnings–were CAD1.25, up from CAD1.20 in the prior corresponding period.

Scotiabank raised its quarterly dividend by 5.3 percent to CAD0.60 per share. It’s the fourth increase since March 2011. Canada’s third-largest bank (Scotiabank’s market cap is CAD71.06 billion) had kept its quarterly rate steady at CAD0.49 per share from its May 2008 declaration of its fiscal 2008 second-quarter dividend until March 2011, when it announced its first post-GFC increase.

We favor Scotiabank over its Big Six peers because of its high exposure to overseas markets. International banking net income grew by 19 percent to CAD466 million during the first three months of fiscal 2013. In addition to a good contribution from the acquisition of Colombia-based Banco Colpatria, management reported a strong increase in asset and deposit volumes in other high-growth Latin American businesses. Provisions for credit losses have risen in line with growth in its portfolios and continuing soft economic conditions in the Caribbean.

Scotiabank has operations in more than 50 countries, including Mexico, Thailand and Peru, which will provide insulation should consumer and home-loan growth slow meaningfully, as many observers expect, in Canada.

Scotiabank’s domestic retail unit posted a 21 percent profit increase, due mostly to its November 2012 acquisition of ING Bank of Canada.

Profit from investment banking rose 28 percent to CAD399 million from a year earlier, management noting “particularly good performance” in the bank’s the fixed-income and precious metals businesses as well as its corporate lending business in the US, Canada and Europe.

Scotiabank’s wealth management and insurance unit posted a 7.6 percent gain to CAD310 million on strong domestic and international sales as well as improved market conditions.  The completion of the acquisition of Colfondos in Colombia in December boosted assets under management as well as assets under administration.

Scotiabank’s common equity Tier 1 ratio on a Basel III all-in basis was 8.2 percent, well above the 7 percent minimum.

Royal Bank of Canada (TSX: RY, NYSE: RY), the largest of the Big Six with a market cap of CAD88.37 billion, boosted its quarterly dividend by 5 percent to CAD0.63 per share. RBC has now announced three more payout increases since its first post-Great Recession move in May 2011, from CAD0.50 to CAD0.54.

Management reported net income of CAD2.07 billion for the quarter ended Jan. 31, 2013, up 12 percent from a year ago.

Domestic personal and commercial banking net income was up 11 percent from a year ago to a company record CAD1.12 billion on 7 percent volume growth across all Canadian businesses, partially offset by spread compression.

Wealth management net income also hit a record, rising by 45 percent to CAD233 million on higher average fee-based client assets resulting from net sales and capital appreciation, increased transaction volumes reflecting improved market conditions and higher semiannual performance fees.

Insurance net income declined by 14 percent to CAD164 million, as the first quarter of fiscal 2012 included net investment gains as well as a new UK annuity reinsurance contract. Capital markets net income was up 25 percent to CAD464 million, driven by strong growth in US lending and loan syndication as well as North American mergers-and-acquisitions and origination activity.

These factors were partially offset by a higher effective tax rate, reflecting increased earnings in higher-tax jurisdictions, higher variable compensation on improved results and higher provisions for credit losses (PCLs) largely related to a couple of accounts.

As of Jan. 31, 2013, RBC’s Basel III all-in common equity Tier 1 ratio was 9.3 percent.

Bank of Montreal (TSX: BMO, NYSE: BMO) raised its quarterly dividend by 2.8 percent to CAD0.74 per share. It’s just the second payout increase for BMO since the end of the GFC. The bank, Canada’s fourth-largest with a market capitalization of CAD41.6 billion, raised from CAD0.70 per share, a level it reached in August 2007, to CAD0.72 per share in August 2012.

Canadian personal and commercial banking net income was up 4 percent to CAD458 million on the year-over-year loan growth of 9 percent and deposit growth of 4 percent, offset by lower net interest margin. PCLs were down as well.

US personal and commercial adjusted earnings were up 17 percent to CAD183 million on lower expenses and lower PCLs. Revenue declined by 3 percent, as higher gains on the sale of newly originated mortgages and increased commercial lending fees were more than offset by the effect of lower net interest margin, a decline in securities gains and lower deposit fees.

Private client adjusted net income surged by 54 percent to CAD169 million due to higher revenue driven by growth in client assets and the impact of cost-management efforts.

BMO Capital Markets’ net income was up 38 percent to CAD310 million on good growth in mergers-and-acquisitions activity and higher debt underwriting fees in North America as well as higher trading revenue. Revenue for the unit was up 17 percent to CAD904 million.

BMO’s common equity Tier 1 ratio on a Basel III all-in basis was 9.4 percent as of Jan. 31, 2013. 

Canadian Imperial Bank of Commerce (TSX: CM, NYSE: CM) maintained its quarterly payout rate at CAD0.94 per share. After announcing a 13 percent increase in August 2007 CIBC maintained that rate for the ensuing 15 quarters, finally raising it again in August 2011 to CAD0.90 per share.

CIBC announced just its second post-Great Recession dividend increase in August 2012, to the present rate of CAD0.94 per share. It’s likely that Canada’s fifth-largest bank with a market cap of CAD33.06 billion, will hold steady until August 2013.

Management reported adjusted net income of CAD895 million for the first quarter of fiscal 2013, up 7.4 percent from a year ago.

Domestic retail and business banking posted net income of CAD611 million, up from CAD567 million a year ago, as revenue grew by 2 percent on volume growth across most products, higher fees and wider spreads, partially offset by lower treasury allocations. PCLs were down 14 percent to CAD241 million.

Net income for CIBC’s wealth management unit was up 38 percent on an adjusted basis. Wholesale banking adjusted earnings were up CAD8 million to CAD200 million, though revenue declined by 2 percent due to lower gains in the structured credit run-off business, partially offset by higher capital markets revenue in fixed income and higher revenue from corporate credit products.

CIBC’s common equity Tier 1 ratio on a Basel III all-in basis was 9.6 percent.

National Bank of Canada (TSX: NA, OTC: NTIOF) boosted its dividend rate from CAD0.62, a rate it held from November 2007, to CAD0.66 in November 2010, which made it the first of Canada’s Big Six banks to raise its dividend following the Great Financial Crisis.

National Bank, the smallest of the Big Six in terms of market capitalization and still often left out in favor of the more traditional Big Five parameter, is also the most concentrated in Canada.

No. 6 has raised its dividend four more times since the November 2010 declaration but held steady when it revealed fiscal 2013 first-quarter results on Feb. 28, 2013.

Adjusted net income for the first quarter was a bank record CAD361 million, up 2 percent from CAD353 million for the first quarter of fiscal 2012.

Personal and commercial banking first-quarter net income was up 5 percent to CAD178 million on solid growth in business activity and “stringent” control of non-interest expenses. Revenue for the segment increased by CAD16 million, as net interest income rose by CAD3 million and non-interest income by CAD13 million. The higher net interest income came mainly from growth in personal loan volume, tempered by a narrower net interest margin.

Wealth management earnings were up 24 percent to CAD51 million, as revenue grew by 5 percent on increased fee-based transaction volume as well as growth in assets under management and administration. Financial markets net income was down by CAD6 million to CAD115 million.

National Bank’s Basel III all-in common equity Tier 1 ratio was 7.9 percent as of Jan. 31, 2013.

The Roundup

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