Banking regulator says pandemic uncertainty means now is not the time to consider higher dividends, share buybacks

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Bank buildings in Toronto’s financial district on September 3, 2020.

Fred Lum / Le Globe and Mail

The Canadian banking regulator will not yet consider lifting restrictions on bank dividends and share buybacks introduced at the start of the pandemic, even as the largest lenders continue to accumulate growing stocks of excess capital.

As parts of the country enter deeper phases of foreclosure, Jeremy Rudin, the head of the regulator, said he expects to see “a clear path to a sustainable recovery” and less “economic uncertainty” before d ‘consider any changes.

Since March, the Office of the Superintendent of Financial Institutions (OSFI) has told banks not to increase quarterly dividend payments or total executive compensation, or buy back shares from investors, in order to preserve capital to absorb shocks. of the coronavirus pandemic. This is one of the main reasons why capital reserves have increased by billions of dollars at each of Canada’s major banks since then.

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Even with no end to restrictions in sight, bank CEOs are beginning to look for opportunities to spend some of that excess cash. But for now, their hands are still partly tied, as the public health outlook looks set to worsen before it improves.

“The fact that indefinite lockdowns of uncertain severity are spreading across the country really means that we are moving away from the situation of reduced uncertainty that we will be seeking rather than towards it,” said OSFI’s Rudin. at a conference hosted by the Royal Bank of Canada on Monday.

At the same conference, executives from several banks expressed growing optimism about the economic recovery in the second half of their fiscal year, which ends on October 31. Everyone agreed that there would be tough months ahead, but most predicted a recovery in consumer confidence. and business investment as federally-led vaccination programs begin to curb some of the novel coronavirus’ worst outbreaks.

Royal Bank of Canada CEO Dave McKay has estimated that between four million and 4.5 million high-risk Canadians must be vaccinated before the national economy can truly reopen. If enough vaccine doses are available, “we could do it in 100 days,” he said.

Bank of Montreal CEO Darryl White said he was “pretty optimistic” about the outlook for the second half of 2021. “You kind of have to think of two timelines. Over the next two to four months, we are going to see the race between the vaccine and the virus, and it will be a tough race, ”he said. “Beyond that, my confidence only increases.”

Mr White predicts that global economic growth could rebound to 5% or 5.5% in 2021, and that Canada and the United States may not be far behind as gross domestic product (GDP) is expected to increase by 4.5% to 5%. this year. The big question for 2022 would be whether that growth rate can be sustained, he said, estimating it could be anywhere between 3% and 4%.

Victor Dodig, CEO of the Canadian Imperial Bank of Commerce, was a little more measured, as economists at his bank predict GDP growth “of around 4% in both markets”.

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A rebound in economic growth could ease spending and demand for new loans that defaulted during the pandemic. Many households and businesses have cut spending, cut savings and paid off debt, aided by massive government stimulus measures. As a result, banks found it harder to deploy excess liquidity from their balance sheets to generate new income, which pushed down profits.

An increase in demand for mortgages has been a notable exception, as a sudden shift to remote working created a spike in demand for housing with more space – often outside major urban centers – that spiked. continued so far this year. But these home loans generate lower profit margins for banks than credit cards or business loans.

The result, compounded by OSFI’s restrictions that prevent banks from returning more capital to shareholders, is that lenders generate more capital than they can use. On Monday, bank CEOs outlined various strategies for using these funds.

Three of the big six banks have indicated their willingness to proceed with mergers and acquisitions. The Toronto-Dominion Bank is often cited as the most likely candidate, and CEO Bharat Masrani said on Monday that the bank used to take advantage of major downturns to close large deals. “If something made sense… would we look at it?” Yes, we would, ”he said. “I expect something to appear given the level of dislocations that have occurred. But that doesn’t necessarily mean we’ll close the deal.

Mr White and Mr McKay both said they would consider making a deal to become stronger outside of their main footprint in the United States – BMO is strongest in the Midwest and RBC in California and New York. . But the two CEOs also said they would invest in their existing businesses first. “We don’t feel pressured into trading,” White said.

The Bank of Nova Scotia has shown little appetite for more transactions after buying and selling a number of companies in recent years. But its leaders want to return the capital to the shareholders. “I was very clear, when the regulator gives us the green flag, the next day we will buy back our shares,” said CEO Brian Porter. “We think our stock is cheap.”

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However, with OSFI showing no signs of changing short-term shareholder payments, investors may need to be patient. “I don’t expect that to change until the second half of this year,” Dodig said. “So we kind of live with that.”

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