Canadian banks are no longer hoarding capital as they did during the economic crisis, but the country's major lenders are still reluctant to return cash to shareholders and deliver regular dividend increases that investors have long counted on.
Analysts expected Bank of Nova Scotia would boost its dividend while reporting third-quarter earnings on Tuesday, but the bank held back on a payout hike even as it reported a 21 per cent increase in net earnings, or 18 per cent excluding one-time items.
Canadian banks hiked their dividends like clockwork until the financial crisis hit and the industry froze payouts. However, the resumption of increases over the past year has been uneven: Increases by certain banks have been sporadic while others haven't raised dividends at all.
Banks are reluctant to rush into further dividend increases in the face of economic uncertainty around the world.
But the key reason Scotiabank passed on its traditional move to raise the dividend about every six months, chief executive officer Rick Waugh said, is the investment climate is yielding opportunities, even amid turmoil. Mr. Waugh said the bank is generating solid investment results, with a return on equity approaching 18 per cent. Those returns are a better use of capital than returning cash to shareholders.
"We obviously think that dividend increases are important … We are also mindful that we earn a very high return on our reinvestment of earnings," Mr. Waugh said. "So it's a balance between what our shareholders should require in dividends, and secondly with the opportunities we see for growth."
"We're looking at this quarter by quarter," Mr. Waugh added.
The bank earned $1.29-billion, or $1.11 a share in third quarter, up from $1.06-billion or 90 cents a share last year, driven by higher earnings at its international operations. Excluding one-time items, the bank's operating profit of $1.14 beat analysts' estimates of $1.12 for the quarter.
Scotiabank is the most internationally focused of Canada's banks, with branches in 50 countries stretching from Mexico to South America and into Asia. The bank is looking to invest capital in expanding those businesses, particularly in markets where profit margins are often better than they are in Canada.
"We remain interested in selective acquisitions and we are well-positioned to respond to opportunities in the marketplace," said Brian Porter, group head of international banking at Scotiabank. "Notwithstanding current global pressures, we remain focused and optimistic about the growth prospects in our regions."
Scotiabank's international banking business made $350-million, up 27 per cent over earnings of $275-million a year ago.
Profit at Scotiabank's Canadian operations rose 4 per cent to $461-million, fuelled by volume growth in mortgages and commercial banking lending. However, those profits were offset somewhat by "ongoing competitive pricing pressures," the bank said, referring to the fierce battle waged with other lenders last quarter to attract borrowers by undercutting rates.
Profit was down slightly at Scotiabank's capital markets division, falling 2 per cent to $289-million. Lower trading revenue in the quarter was partially offset by increased trading in precious metals, such as gold, and foreign exchange.
The bank's global wealth management division made $256-million, up 16 per cent over profit of $221-million a year ago, helped by the integration of recently acquired DundeeWealth.
Scotiabank also reported a loss of $71-million in other operations, due to changes in accounting methods, the bank said. That was down, however, from a loss of $181-million a year ago. Provisions for credit losses, or the amount banks set aside to cover bad loans, were $243-million in the quarter, compared to $262-million last quarter and $276-million a year ago.
Mr. Waugh said the results showed an ability to earn profit through "challenging times."
Some analysts were surprised the dividend wasn't boosted. After Scotiabank increased its payout ratio – the amount of earnings it pays out to shareholders – to between 40 to 50 per cent late last year, analysts interpreted the move as a return to days of more than one dividend increase a year.
Mr. Waugh said the payout range was boosted in 2010 because the bank expected a lower growth environment.
"We did increase the dividend [ratio]because the world is not growing quite as quickly. And yet we're still having this high return on equity," Mr. Waugh said.
Scotiabank last hiked its dividend in March. Toronto-Dominion Bank, which reports on Thursday, is seen as a candidate for a dividend hike, while Canadian Imperial Bank of Commerce is considered a long-shot by some when it reports on Wednesday.
But should CIBC boost its payout, Bank of Montreal would be left as the only major Canadian bank that has not increased its dividend since the financial crisis of 2008 when regulators recommended that lenders preserve capital and avoid dividend increases. That unofficial freeze was lifted last September.