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Rick Waugh, president and CEO of Scotiabank.

Ian Jackson/Ian Jackson/THE GLOBE AND MAIL

Investors waiting for a dividend increase from Canada's major banks got some encouraging words from Bank of Nova Scotia 's Rick Waugh, who indicated Tuesday that it's on his list of priorities for the year ahead.

In doing so, Mr. Waugh signalled Scotiabank is among the banks that could move first on a dividend hike once their new capital requirements are known.

"Certainly our shareholders have said - and we certainly agree - increasing dividends is something we all look forward to," Mr. Waugh told analysts on a conference call after Scotiabank reported a 14-per-cent rise in third-quarter profit.

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"We're not going to give you a time frame and we're not going to give you numbers because, until it comes out, I think that would be premature. But we are certainly looking forward to the future in that regard," he said.

The prospect of a dividend hike is the move many shareholders are most anticipating, after two years of no increases. Canada's banks have agreed to a temporary freeze on payouts, suggested by the country's banking regulator, as new rules are drawn up for the global banking system.

Once the banks know exactly how much so-called Tier 1 capital they must keep on their books to backstop their operations, they will know how much surplus capital they have to devote to other uses, such as acquisitions and dividend increases.

They All Do It

"Every bank will eventually raise dividends, it's just a matter of timing," said Canaccord analyst Mario Mendonca.

Though Mr. Waugh was careful not to indicate a date for the move, Mr. Mendonca believes Scotiabank would not act before late 2011 at the earliest.

Toronto Dominion Bank and National Bank are likely to move before then, because their dividend payout ratios are considerably lower than their peers - and National appears to be the most bullish of the group. National Bank's shares have been on a run in recent days after CEO Louis Vachon indicated to analysts last Thursday that he favoured a dividend increase.

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"We're below our [dividend payout ratio]target. So I think it's quite clear what our next step would be," Mr. Vachon said, adding that he would prefer that strategy over a share buyback. "To the extent that we have good visibility on the regulatory side, the priority will be on the dividend side."

National's shares have risen more than 10 per cent since then. Macquarie analyst Sumit Malhotra calculates National's dividend payout ratio at 39.4 per cent for the third quarter, while TD - which reports its quarter on Thursday - is expected to be at about 41.3 per cent based on earnings projections. Scotiabank's payout ratio is about 49.5 per cent, Mr. Malhotra said, putting it in the middle of the pack for the banks.

Bank of Nova Scotia

Scotiabank made $1.06-billion, or 98 cents a share, in its third quarter. That compared to profit of 931-million, or 87 cents a share in the same period last year. Revenue was relatively flat at $3.78-billion. Earnings were equal to 99 cents a share before one-time items, slightly below the $1 a share on average that analysts were expecting.

In a trend seen across the sector this quarter, the bank's capital markets division reported a slump in earnings as the European sovereign debt crisis shook up trading this summer. Profit at Scotia Capital fell 35 per cent, to $305-million.

The drop was offset by stronger earnings at the Canadian retail banking division, and smaller credit loss provisions. The Canadian retail banking division made $604-million, an increase of 21 per cent, while provisions for credit losses - which are the amount of money banks set aside to cover bad loans - were $276-million, a drop of about 50 per cent from a year earlier.

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Scotiabank's international banking division, which includes its branches in Asia and the Caribbean, made $317-million, up two per cent. The bank said it is experiencing a slowdown at its Caribbean business, since lending to hotels and resorts is drying up as the economy struggles to recover, particularly relating to the U.S. tourism industry.

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Grant Robertson is an award-winning journalist who has been recognized for investigative journalism, sports writing and business reporting. More

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