The Canadian economy is primarily centered in two sectors – the financials and energy sector.
In particular, Canada is known to have one of the soundest banking systems in the world. The Canadian banks have been ranked by the World Economic Forum as the world soundest banks for eight years in a row.
The Canadian banks are a relatively small peer group, and are concentrated in five companies known as the “Big Fiveâ€:
- The Royal Bank of Canada (RBC)
- The Toronto-Dominon Bank (TD)
- The Bank of Nova Scotia (BNS)
- The Bank of Montreal (BMO)
- The Canadian Imperial Bank of Commerce (CIBC)
These companies have a phenomenal record of delivering value to shareholders, demonstrating total returns well in excess of the S&P/TSX Composite Index.
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Source: Bank of Nova Scotia 2016 Annual Report
This article will assess the dividend prospects of one bank in particular – the Bank of Nova Scotia. Known as Canada’s most international bank, they are the third-largest in their peer group as measured by both total assets and by market capitalization.
They are also a member of the Canadian Dividend Aristocrats Index, Canadian stocks with 5+ years of consecutive dividend increases.Note that this is different than the traditional Dividend Aristocrats Index, which are companies with 25+ years of consecutive dividend increases.
Investors with an eye on the Canadian markets will know that it’s earnings week for the Canadian banks. On November 29, the Bank of Nova Scotia reported earnings for the ninety-day and one-year period ending October 31, 2016. This article will cover that earnings release in detail.
 Business Overview
The Bank of Nova Scotia was founded in 1832 and since then, has grown into a diversified financial services conglomerate with more than 85,000 employees. They divide their business into three main operating segments:
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Canadian Banking, which provides a full suite of financial service products to more than 8.5 million Canadian customers. Canadian banking is further divided into the following categories:
- Retail and Small Business Banking
- Commercial Banking
- Wealth Management
- International Banking, which provides financial products, services, and advice to more than 14 million customers in countries like Latin America, the Caribbean and Central America, and parts of Asia. This segment is a key component of the Bank’s value proposition to shareholders and will be discussed further in other parts of this article.
- Global Banking and Markets, which provides customers with investment banking, corporate banking, and capital markets solutions tailored to their specific needs.
Fourth Quarter Financial Performance
 Before exploring the investment prospects of the Bank of Nova Scotia, let’s consider their recent earnings release. The Bank recently reported earnings for the fourth quarter as well as the fiscal year 2016. Their quarterly results are summarized in the following table.
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Source: Bank of Nova Scotia Fourth Quarter Earnings Presentation
The Bank reported robust growth in a number of important metrics for Q4, including net income (+9% YoY), diluted EPS (+8% YoY), and revenues (+10% YoY).
Since October 31 represents the end of fiscal 2016, Scotiabank also provided investors with a summary of their annual financial performance. Here is the data:
- Net income of $7,368 million, compared to $7,213 million (+2%)
- Diluted earnings per share of $5.77 compared to $5.67 (+2%)
- Return on equity (ROE) of 13.8%, compared to 14.6% (-800bps)
- Annual dividends per share of $2.88 compared to $2.72 (+6%)
The Bank incurred a very significant restructuring charge of $275 million (after-tax) in the second quarter of this fiscal year. The Bank cited “strategic efforts to enhance customer experience, drive a digital transformation and improve its productivity†as the reasons behind the restructuring. Adjusting for this charge improves the numbers mentioned above.
- Net income of $7,646 million, compared to $7,213 million (+6%)
- Diluted earnings per share of $6.00 compared to $5.67 (+6%)
- ROE of 14.3%, compared to 14.6% (-300bps)
Scotiabank’s growth in the quarter and financial year were predominantly driven by their International Banking segment, which produced a record year for net income. This is particularly true for the fourth quarter, as displayed in the following diagram.
