Ban on dividend hikes to stay
A federal financial watchdog says it's in no rush to end its bans on dividend increases and share buybacks by Canadian banks, pouring cold water on an item of interest a week before the country's Big Six lenders report their latest results.
The Office of the Superintendent of Financial Institutions (OSFI) announced in March that, in response to the coronavirus pandemic, it expected all federally regulated financial institutions to stop buying back their stock and boosting their dividend payouts.
Those restrictions are still in place, with Superintendent Jeremy Rudin telling a webinar on Monday that the most important factor in deciding when to unwind them is the level of economic uncertainty.
“This means that there is no set date nor specific economic indicator that will trigger our decision,” Rudin said, according to the text of the speech, which was published on Tuesday. “We'll begin to relax those restrictions when we get to the point where we think that there are few if any plausible paths that lead to a second pandemic-induced setback for the economy.”
Rudin added that the regulator doesn't think that leaving the restrictions on “a bit too long” is as big a mistake as removing them too soon.
“If we have the restrictions in place longer than necessary, the capital simply stays in the bank and it will be there to be distributed later when the restrictions come off,” he said. “If, on the other hand, we take the restrictions off too soon, the capital leaves the bank and it cannot be recaptured when it is needed.”
Rudin's remarks come a week before Canada's biggest banks are to report their latest financial results, which are expected to show the lenders sitting on a considerable stockpile of capital. Given that bank dividends are revered by Canadian investors, there could be questions for executives about capital distributions when the Bank of Montreal and Bank of Nova Scotia kick off the earnings season on Dec. 1.
“The conversation on capital will soon turn to deployment,” predicted CIBC World Markets analyst Paul Holden in a Nov. 18 report. “All the banks exited (their fiscal third quarters) in strong capital positions and those positions should look even better with (the fourth quarter).”
Other countries have barred banks from paying dividends altogether. Rudin, though, said the past few months have shown the Canadian banking system was “well prepared” for the coronavirus crisis, with plenty of capital, liquidity and “operational resilience.”