Acquisitions possible with Canadian banks' excess cash
Investors are urging Canadian banks to deploy their record levels of excess cash on acquisitions that will aid long-term growth before buying back shares.
Questions about how lenders will spend the $70 billion they are holding above the current regulatory minimum is drawing increased focus after regulators in the United States, Europe and Australia began lifting prohibitions on returning some capital to shareholders in the last week.
Analysts and investors expect Canada's Office of the Superintendent of Financial Institutions (OSFI) to lift its March moratorium on share buybacks and dividend increases in mid- to late-2021.
The global moves are “telling me they think the worst is behind them,” said Allan Small, senior investment adviser at Allan Small Financial Group with Holliswealth, urging Canada to lift the freeze “sooner rather than later.”
But investors are not enthused about the EPS growth expected to result from a resumption of buybacks, which some investors see as artificial because it results from a smaller share base, not organic growth.
Rather, they want banks to use the money to strengthen their financial technology and pursue acquisitions, particularly in the United States, in wealth management and other recurring fee-generating businesses and those that will bolster organic growth.
Royal Bank of Canada, Toronto-dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada had $262 billion of Common Equity Tier 1 (CET1) capital, a measure of core capital, in the October quarter.
That is the highest since the tougher capital requirements of Basel III took effect in 2013,
Meanwhile, Canadian lenders are trading near a 40 per cent premium to U.S. regional banks' book values, making acquisitions attractive, National Bank Financial Analyst Gabriel Dechaine wrote last week.