When will the banks start raising their dividends again? I read that the regulator recently unwound temporary rules aimed at helping banks weather the pandemic, and I’m wondering if that opens the door for dividend hikes.
I hate to break it to you, but the announcement you are referring to had nothing to do with dividends. On March 16, the Office of the Superintendent of Financial Institutions said that, effective May 1, it will unwind regulatory adjustments to market-risk capital requirements for banks. These adjustments were put in place at the start of the pandemic to give the banks the flexibility to address stressed conditions, but now that markets have stabilized the measures are no longer required, OSFI said.
The prohibition on dividend increases and share buybacks – which OSFI introduced in March, 2020, along with other measures to promote stability of the financial system – remains in place.
But there’s reason for optimism: With banks carrying large amounts of excess capital and vaccinations ramping up, a resumption of dividend hikes may not be far off.
“Capital levels are now at record highs, so the banks really are in good shape,” Michael Clare, vice-president and portfolio manager with Brompton Funds, said in a webinar this week. “I think this is going to be supportive of the resumption of dividend growth and buybacks later this year.”
OSFI could begin relaxing restrictions as early as the end of June, following the lead of the U.S. Federal Reserve, Mr. Clare said.
Rising interest rates are another reason to be optimistic about the banks, Mr. Clare said. Thanks to a steepening yield curve, banks benefit from higher net interest margins by borrowing money at ultralow rates from depositors while lending out longer-term money at higher rates.
In another positive sign for the sector, banks are coming off a very strong first-quarter earnings season. Falling loan loss provisions and solid results from capital markets and wealth management operations helped the banks post results that exceeded expectations.
The combination of robust earnings and a year-long ban on dividend increases has left all of the Big Six banks with “significant excess capital,” Odlum Brown analyst Benjamin Sinclair said in a recent note.
“For instance, TD’s common equity tier 1 (CET1) ratio has increased by nearly two percentage points over the past 12 months, despite the stresses of the pandemic, and is more than four percentage points over the regulatory minimum. In dollar terms, TD is holding $21-billion of excess CET1 capital, a substantial cushion should loan losses prove to be more than forecast,” Mr. Sinclair said.
One potential obstacle, however, is the rise of deadlier, more contagious variants of the coronavirus. OSFI appears to be waiting for clear signs that the pandemic – and the economic dislocation it has caused – is easing before removing restrictions on dividend increases.
“We would need a substantial reduction in the uncertainty … and we would want to be confident that there is not a second, pandemic-induced setback for the economy before we could give serious consideration to lifting the restrictions,” OSFI head Jeremy Rudin said at a banking conference in January.
Given OSFI’s cautious tone, some analysts say the restriction on dividend increases may not be lifted until after third-quarter earnings are reported in late August, by which time vaccinations will be more widespread and health authorities should have a better handle on the pandemic’s trajectory.
“We expect every bank will increase its dividend when permitted and that the increases will be in the 5- to 8-per-cent range,” Paul Holden, an analyst with CIBC World Markets, said in a research note.
National Bank of Canada (NA) and Bank of Montreal (BMO) “stand out as having capacity to do more, but it would make sense to us to manage to a lower payout in the interim and grow dividends faster in subsequent years,” Mr. Holden said.
Bank stocks have posted double-digit gains this year thanks to solid earnings and expectations that capital restrictions will be lifted. But even after the run-up, dividend yields are still attractive, ranging from a low of about 3.3 per cent for National Bank to a high of about 4.7 per cent for Canadian Imperial Bank of Commerce (CM).
With banks poised to resume dividend hikes – something they did with regularity before the pandemic – investors who buy bank stocks can almost certainly look forward to their income growing for years to come.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.