Tuesday, March 4, 2008

canadian bank follow up / summary

Last month in my post regarding the state of Canadian bank dividends, I noted that an analyst (Robert Sedran) commented about the possibility that Royal Bank (RY), TD Bank (TD), Bank of Montreal (BMO), and CIBC (CM) may forgo dividend increases this quarter as profits decline. Canadian banks have been raising dividends twice per year, but he commented that dividend increases could be postponed because average profits before one-time items could be down around 1.4%. He would view any increases as a bullish sign.

I'd like to follow up on this post by reviewing what has transpired earnings-wise, particularly for the Canadian banks that I follow:

TD Bank (TD) - Profit rose 5%. Raised dividend 3.5% to $0.59/quarter. This dividend increase is 'on schedule', however the increase is at a slower rate than the bank has been in the habit of raising. TD was the darling of the Canadian banking sector this quarter. They have no subprime exposure, less emphasis on capital markets, and their Canadian retail franchise is strong. TD's dividend increase, although smaller, could be viewed as a bullish sign for the bank going forward.

Royal Bank (RY) - Profit declined 17%. Did not raise dividend. This lack of a dividend increase stops their streak of semi-annual raises which they have maintained going back to January 2005. The strong Canadian dollar, weakness in capital markets, and charges related to U.S. asset backed paper and subprime exposure.

Bank of Montreal (BMO) - Profit declined 27%. Did not raise dividend, did not cut dividend. This lack of a dividend increase stops their streak of semi-annual raises which they have maintained going back to 2003. Write downs, investment banking losses, and credit provisions were blamed, and the bank does not expect to meet it's annual targets in 2008.

Bank of Nova Scotia (BNS) - Profit declined 18%. Scotia was not due or expected to raise their dividend. Profit in international operations, the strong loonie and credit provisions were blamed.

In summary Sedran was probably optimistic for the quarter compared with what occurred. TD Bank has to be viewed as the strongest player right now as they are less involved in the messes south of the border, and producing some good numbers in Canada. It seems BNS, RY, and TD have all been taking advantage of the strong loonie by purchasing non Canadian assets lately, which could turn out to be wise long term.


Thicken My Wallet said...

Gotta watch TD's exposure on the BCE transaction. It has already written down a part of the loan before the transaction has closed. Could be an issue going forward.

As much as I like dividend increase, I thought the banks were prudent to not increase dividends and focus on cost control. It may allow them more free cash to buy other banks.

MG said...

tmw, I agree. But I still need dividend growth out of RY and BNS long term so I want annual increases to average out to healthy numbers. Given their histories I can certainly excuse some lean years.

FinancialJungle said...

Good summary. I also agree that inert dividend policy is prudent. I don't mind forgoing increases in the short-term. Being able to buy banks at these yields is almost like receiving dividend hikes anyway. Yeah, almost...