As loan losses decline and profits and capital levels rise, when will the Big Six banks finally be allowed to raise dividends or buy back stocks?
The country’s banking regulator on Thursday rolled back a change it made very early in the pandemic, which only heightened the sense of anticipation about dividend hikes and buybacks. In short, most analysts believe that banks will be free to implement these shareholder-friendly measures this fall. And many expect the hikes and buybacks to be larger than normal.
As a backdrop, the Office of the Superintendent of Financial Institutions (OSFI) took three steps in March 2020 that aimed to ensure that banks could withstand a big wave of bad loans and still be able to lend to businesses and corporations. Canadian consumers who needed credit.
Among these measures: OSFI reduced what is known as the Domestic Stability Reserve – a layer of regulatory capital meant to be built up in good times so that it can be used for lending in bad times. That move is now reversed, however, with the increase announced Thursday by OSFI which is expected to take effect at the end of October.
OSFI said it made the decision because “the economic and market disruptions resulting from the pandemic have abated and bank capital levels have been resilient.”
That same confidence, analysts increasingly believe, will lead OSFI later this year to reverse the two other changes it made in March 2020 – telling banks not to raise dividends or buy back stocks until. what the regulator deems appropriate to do.
Canaccord Genuity analyst Scott Chan on Friday said he believed the green light would come in September. And he thinks the dividend hikes will be bigger than usual.
Banks typically aim to pay a dividend that is between 40 and 50 percent of their profits. As a group, banks are now paying around 40% of their expected profits for fiscal 2022. This means large dividend increases will be needed to bring payout ratios closer to the middle of the target range.
Robert Wessel, former Bay Street analyst and now managing partner of Hamilton ETFs, is also forecasting big dividend hikes. Bank capital levels have reached levels well above those required by OSFI, he notes, and he believes the regulator could have lifted its hike ban already.
“It’s a bit silly that [OSFI] does not authorize the dividend [hikes] right now, ”Wessel told me in an interview Thursday. “Come to think of it, Canadian banks have never made more money. They made $ 14.5 billion last quarter; it is the highest all-time high by a fairly significant margin.
“However, at some point when they are allowed to increase dividends, the increase will be that much higher. “
The National Bank of Canada and the Bank of Montreal are considered to be the banks most likely to record the highest dividend increases.
Credit Suisse analyst Mike Rizvanovic recently said that National “has by far the most significant dividend-raising capacity among the Big Six, followed by BMO.”
Meny Grauman of Scotia Capital agrees.
“Assuming that National Bank wants to reduce its payout rate to 42%, which is at the bottom of its target range of 40-50%,” Grauman wrote recently, “then it will have to increase its current payout by 16 to hundred. hundred. “