Dividends take centre stage in big banks’ game plan

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Canada's biggest banks made a combined $7.7-billion in the first quarter, but the most important number to emerge for investors over the past week is the number of dividend increases that emerged – a clear sign that banks are willing to raise their payouts with more frequency these days.

Several lenders are entertaining small dividend increases more than once a year, as opposed to the annual increases in past years. While this has pushed several banks toward the upper end of their payout ratios, it has been a boon for investors hoping the dividends would flow after the economic downturn.

Bank of Nova Scotia became the fourth member of the Big Six lenders to boost its dividend after the first quarter, increasing its payout to 63 cents, a gain of 5 per cent.

That came just days after Royal Bank of Canada and Toronto-Dominion Bank also increased their dividends by 5 per cent, and Bank of Montreal announced a 3-per-cent increase.

As one analyst pointed out Tuesday, Canadian banks are looking at more frequent hikes these days. While that's no guarantee of an increase every second quarter, it's a noteworthy move as banks try to balance investor dividend payouts with the prospect of a slowdown in the year ahead, which could curtail profit growth.

Asked about Scotiabank's plans for future dividend hikes, and whether it would follow some of its rivals by addressing dividend hikes every other quarter, chief executive officer Rick Waugh was non-committal about the frequency of hikes the bank would be willing to entertain.

"We do recognize the importance, especially in these somewhat uncertain times, of the dividend," Mr. Waugh told analysts on a conference call. "We have a long, century-long, history of dividends and it'll be one or two or whatever we deem is relevant in terms of maintaining our payout ratio and the opportunity we have to invest and grow."

Scotiabank's profit rose 13 per cent in the first quarter, driven by strong performances in its international operations and its acquisition of ING Direct Canada.

Canada's third-largest lender made $1.63-billion or $1.25 a share in the quarter. That compared to profit of $1.44-billion or $1.20 during the same quarter last year, which included a gain of 8 cents a share from the sale of its offices in Calgary. Revenue rose 12 per cent to $5.18-billion.

The results were better than analysts' expectations. On a cash basis, factoring out unusual items, Scotiabank made $1.27 a share. Analysts were expecting earnings of $1.25 a share on average.

Scotiabank's provisions for credit losses, or the amount it set aside to cover bad loans, were $310-million, down from $321-million the previous quarter. However, that was an increase from $285-million a year ago.

The Canadian operations made $574-million in the quarter, up 21 per cent, boosted by ING Direct Canada and an increase in residential mortgages. However, the bank's core margins declined slightly, to 2.3 per cent from 2.35 per cent, due to the ING business, which has slimmer spreads on its loans and deposits.

"The margin for Canadian banking is now lower due to the acquisition of ING. But for the balance of the year, we expect the margin to stay relatively stable," Scotiabank president Brian Porter said.

The bank's international operations made $466-million, up 19 per cent, helped by its purchase of Colombian lender Banco Colpatria, but hindered slightly by a rise in credit losses in the Caribbean. The global wealth management division made $310-million, an increase of 8 per cent.

The investment banking division made $399-million, up 28 per cent, driven by increases in revenue from trading in bonds and precious metals, and strength in its corporate lending business throughout North America and Europe.

CIBC World Markets analyst Rob Sedran called the earnings a "solid" and "low-drama" quarter for Scotiabank, with no unexpected developments. "Over all, this was the type of quarter we have come to expect from this bank," Mr. Sedran said in a note to clients.