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Canadian regulator lets banks, insurers lift dividends, ending pandemic-era curbs

Canadian banks and insurers can resume dividend increases and share buybacks and raise executive compensation, the country’s financial regulator said on Thursday, lifting a moratorium it imposed in March 2020 and possibly paving the way for a boost to the sector’s valuation.

The Office of the Superintendent of Financial Institutions (OSFI) said in a statement that the measures had been effective over the past year and a half but are no longer necessary.

Canada’s six biggest lenders – Royal Bank of Canada (RY.TO), Toronto-Dominion Bank (TD.TO), Bank of Nova Scotia (BNS.TO), Bank of Montreal (BMO.TO), Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO) – had almost C$49 billion ($39.4 billion) in capital in excess of the current minimum requirement in the quarter ended July 31.

“When you have lazy equity, surplus capital, that suppresses return on equity and depresses the valuation,” said Brian Madden, portfolio manager at Goodreid Investment Counsel.

Madden added that he expects the banks to announce changes to their capital distributions when they report fourth-quarter results in early December.

“This (move) creates an impetus for valuation multiples to expand,” Madden said.

The Canadian banks index (.GSPTXBA) has risen 82% during the 20 months with the moratorium in place. The U.S. banks benchmark (.DJUSBK) has jumped 107% during the same time.

Canadian banks’ attractive dividends yields are a big draw for investors. But they grew increasingly impatient as regulators in other parts of the world, including the United States, Europe and Australia, lifted their curbs.

Most of the banks’ dividend payout ratios had slipped in the first three quarters of fiscal 2021 from the same period of fiscal 2019, to the high 30s, compared with their target ranges of 40-50%. They are expected to fall below their three- and five-year averages for 2021, according to analysis by Canaccord Genuity.

Superintendent of Financial Institutions Peter Routledge defended the delay in a media call on Thursday, saying the regulator felt “a little caution, a little bit more prudence for a few more months wouldn’t hurt the system,” particularly as COVID-19 cases rose into the summer.

In June, OSFI said it would raise the minimum capital buffer to guard against risks to a record high starting on Oct. 31, a reversal of one of the pandemic-era measures to support financial institutions and boost lending. read more

National Bank and BMO could increase dividends by the most to reach the mid-point of their targeted ranges, by 38% and 33% respectively, the analysis, based on fiscal 2022, showed.

BMO shares rose 0.9% and National Bank gained 0.5% following the announcement.

Life insurer Sun Life Financial (SLF.TO) could lift dividends by 33% and Manulife Financial (MFC.TO) by 9%, Canaccord said.

TD, BMO and Royal Bank, which have the most excess capital, could pursue outsized share repurchases, said Anthony Visano, portfolio manager at Kingwest & Co.

“Today’s announcement is prudent given pandemic-related risks have been reduced, Visano said.

($1 = 1.2425 Canadian dollars)

Reporting by Nichola Saminather; Editing by Andrea Ricci and Will Dunham

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