Another round of stellar quarterly profits has provided Canadian banks with the ammunition they need to hunt for a new round of acquisitions.
Three of the country's biggest six banks achieved record profits this quarter while five reported capital levels well in excess of regulatory requirements.
Many observers have worried in recent years that Canadian lenders will suffer as the country's mortgage market cools, but the concerns are fading after yet another strong earnings season. Now there is speculation about what the banks will buy next.
During the fiscal first quarter, the domestic banking arms of all the lenders again churned out solid profits, while wealth management – and in some cases, capital markets – more than stepped up to offset the slowdown in consumer lending.
Four of the banks posted common equity capital ratios north of 9 per cent, meaning their common equity amounts to at least 9 per cent of their risk-weighted assets.
In Canada, the banks must meet an 8-per-cent minimum, so they have room to spare if they spend on acquisitions.
On Tuesday, Bank of Nova Scotia became the last of the Big Six banks to report first-quarter earnings, and its results mirrored the sector's encouraging trends. The lender's strong earnings from Canadian banking coupled with its hot wealth management arm propelled it to a $1.7-billion profit.
On a conference call with analysts, chief executive officer Brian Porter was asked about what the bank would do with all its capital. He said it is looking at buying opportunities.
"If we see anything that's [in line with our] strategy, we'll take a good hard look at it," Mr. Porter said, later adding that "the phone continues to ring, and there will be opportunities within our footprint."
His comments do not guarantee that Scotiabank will ink a deal. Although the bank has stressed its interest in expanding in the wealth management area, Royal Bank of Canada made it clear last week that assets in that market are extremely expensive at the moment.
RBC CEO Gordon Nixon said the bank looked at "a tremendous number of opportunities in the wealth management space in the last year or so," but management was deterred by the high valuations."While there are assets available, it's very difficult to make them work," he said.
But geographic preferences can alter the equation. Bank of Montreal recently struck a $1.3-billion deal for London-based F&C Asset Management, and Scotiabank has signalled it would like to expand in South America.
Although Scotiabank reported encouraging results from Canadian banking and wealth management, its international banking division experienced another soft round of earnings, with profits sliding for the second successive quarter to $401-million. Loan activity is growing in Asia and South America, but the bank is making less per loan. Rising expenses are also taking a toll on the division, and Scotiabank has pledged to take action on the problem.
Scotiabank's international arm has been a growing concern because of recent bumps in earnings. The current emerging-markets crisis only adds to the worries, because people are pulling money from developing countries and redeploying it in developed markets.
Management has long argued that its South American operations are relatively immune from most emerging-markets problems because countries such as Peru and Colombia have strong growth. "Not all emerging markets are created equally," Mr. Porter said. "Our operations in emerging markets are an important long-term growth story for Scotiabank," he added.
Scotiabank's quarterly earnings amounted to $1.32 a share, up 6 per cent from the previous year. After adjusting for one-time items, Scotiabank made $1.34 a share.
The bank raised its dividend by 2 cents, bringing it to 64 cents quarterly, while also announcing it will eliminate the 2-per-cent discount offered to shareholders who participate in its dividend-reinvestment plan.