National Bank of Canada NA-T has ended the lengthy freeze on dividend hikes that has left bank investors without an increase in more than two years.
But as the bank announced a dividend increase of 6.5 per cent - setting the stage for other Canadian banks to follow suit - it also embarked on a key strategic shift inside its investment banking division.
Facing increased competition for the investment banking dollars of Canada's largest companies, National Bank has decided to concentrate on smaller firms. The shift is happening amid an influx of large foreign banks battling to advise on mergers and to lead stock offerings, while the other big domestic banks bulk up in those areas to claim market share.
National Bank Financial will instead move its focus to smaller-cap firms, especially in mining. The restructuring includes the layoff of about 35 people, including senior sales and trading positions, as well as investment bankers and research analysts. The reductions are equal to 14 per cent of the total staff in equities and investment banking.
"It was time to sit back and look at what's working and what's not," said Ricardo Pascoe, co-chief executive officer of National Bank Financial. The announcement came as National reported a 19-per-cent increase in fourth-quarter profit. It also took a $15-million charge relating to the internal restructuring.
The move resulted in the departure of some high-profile names, including Tanya Jakusconek, a highly ranked gold analyst who covered senior producers such as Barrick Gold Corp.,, and telecommunications analyst Greg Macdonald.
The changes come as the firm faces tougher markets. Trading activity is less profitable and, aside from a few hot sectors like mining, several areas of investment banking remain sluggish.
The smaller and mid-size companies National Bank will focus on generate an outsized share of the fees paid in Canadian investment banking, as they are constantly going to market for new equity and doing merger deals.
National Bank's profit in the fourth quarter was $287-million, or $1.66 per share. That compared with $241-million, or $1.39, a year ago. Revenue rose slightly to $1.095-billion from $1.092-billion.
"Such solid results, combined with our strong capital position and the quality of our credit portfolio, have allowed us to raise shareholder dividends," National Bank chief executive officer Louis Vachon said in a statement. The dividend hike will boost National's quarterly payout to 66 cents, an increase of 4 cents.
The industry freeze on dividend increases came after the banks were told by the federal regulator in 2008 to preserve capital until new global regulations were introduced this fall. That period marked an unusually long dry spell for shareholders awaiting an increase as bank profits rose.
Montreal-based Laurentian Bank was the only Canadian chartered bank to increase its dividend in the past two years, announcing a two-cent increase, to 36 cents, to its quarterly payout in late 2009. The rest of the big-six banks are to report earnings in the coming week; it is believed at least one or two of them will consider dividend increases in the next few quarters.
National Bank's earnings were released after the markets closed on Tuesday. The layoff announcement came earlier in the day and caused the bank's shares to fall 89 cents to $67.84 on the Toronto Stock Exchange.
A decline in trading profits hurt the bank's financial markets business. The markets arm reported that net income fell to $104-million from $147-million a year ago, as revenue declined to $360-million from $412-million.
The goal of the restructuring is to funnel some of the savings into new hires in its mining area, from bankers and traders to analysts, to establish a bigger business helping medium-sized miners. In Quebec, National Bank will still keep a focus on larger companies as well as mid-cap firms.
The competition is still strong even when serving small and mid-range companies, those under $2-billion of market capitalization, however it's more from boutique firms. NBF is hoping that its ability to offer services such as hedging, lending and debt underwriting that boutiques generally don't have will be an advantage.
NBF has tried the same strategy in the energy business and it has paid off with more advisory mandates on deals, the bank said. Mr. Pascoe also cited "pressure on margins in investment banking and equities" as a reason for the cutbacks.
It has been a tough year in many parts of the investment banking market. Several sectors have quiet on the deal front, leaving investment bankers fighting for business. And trading has become a much tougher business as commissions have fallen while costs have risen. That means research, which is traditionally paid for through trading commissions, is harder to justify, especially if it's research on companies that don't provide investment banking business.
"The costs of trading have gone up, while revenues have gone down," said Gerry Throop, the head of global institutional equities at NBF.
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