'Release the capital!': Banks can resume dividend hikes, buybacks – BNN

The Office of the Superintendent of Financial Institutions has lifted its pandemic-era prohibition on the shareholder-friendly moves that bank investors have come to crave.

In a speech Thursday afternoon, Peter Routledge, the superintendent of financial institutions, said that effective immediately, federally regulated lenders will be allowed to hike regular dividends and executive compensation. Share buybacks will be allowed, subject to the superintendent’s approval.

“As we update our expectations on capital distributions, we continue to expect that management and boards of directors will act responsibly, and employ robust risk management practices and sensitivity analysis that uses conservative and prudent assumptions to guide decisions pertaining to capital distributions,” Routledge said in a release.

The decision by Canada’s banking regulator comes more than a year and a half after the country’s federally regulated banks were told to stop raising their dividends and buying back shares. OSFI announced that expectation of lenders under its purview in March 2020, as it aimed to ensure the financial system could withstand the ravages of COVID-19.

However, not only did the banks withstand the pandemic, they thrived as the feared wave of loan defaults never materialized.

As a result, they’ve seen their capital climb well above required levels – which has spurred anticipation for the day when they’d be able to share the wealth with investors.

In a report to clients after OSFI unshackled the banks on Thursday, Barclays Capital Analyst John Aiken said that among the Big Six, Bank of Montreal and National Bank of Canada are best positioned for big dividend hikes in the near term, while Laurentian Bank stands out among the regional lenders.

“With a considerable level of excess capital, we expect the Canadian large cap banks could go beyond their usual conservative stance, and reward investors with a more aggressive bias for dividend hikes and share buybacks,” he wrote in a note titled At Long Last, OSFI Announces…Release the Capital!

Aiken pointed out that dividend hikes don’t chew into accumulated capital levels, and estimates that the Big Six will still be sitting on $48 billion in excess capital after they raise their dividends — which opens the door for share buybacks, M&A, or what the industry calls “inorganic” growth.

Similarly, in a report to clients on Sept. 1, Credit Suisse analyst Mike Rizvanovic pinpointed National Bank of Canada as having the most capacity to raise its dividend, estimating that at a 45 per cent payout, the bank’s quarterly dividend could jump 40 per cent in fiscal 2022 to $0.99 per share from the current rate of $0.71.

For the Big Six lenders as a whole, Rizvanovic pegged the average potential quarterly hike at 17 per cent.

“Regulatory [Common Equity Tier 1] capital ratios for the Big Six continue to trend higher, ending the third quarter at a very robust average of 13 per cent, driven mainly by strong earnings growth but also aided by an absence of share buybacks and a suppressed quarterly dividend due to OSFI’s ongoing restrictions on capital return to shareholders. We continue to model [the fourth quarter] for a removal of restrictions,” Rizvanovic said in the report.

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