I expect OSFI to announce banks can pursue dividend hikes and share buybacks: Analyst
Canada’s banking regulator is going to provide an update this week that could be music to the ears of investors.
The Office of the Superintendent of Financial Institutions (OSFI) confirmed in a media advisory Tuesday that its superintendent will make an announcement about capital distributions for federally regulated financial institutions on Thursday.
OSFI imposed a halt on share buybacks and dividend hikes in March 2020 as it sought to shield federally regulated lenders from the ravages of COVID-19.
As Canada made progress in its fight to contain the pandemic, bank executives were frequently asked about their plans for an eventual lifting of the clampdown, and investors have mused about the potential gusher of dividends and buybacks as banks built up their capital levels.
“We think our shares are still inexpensive and very attractive. And when the regulator gives us the green light, we'll be buying our own shares back,” Bank of Nova Scotia Chief Executive Officer Brian Porter said in an interview in December, when his company’s shares were trading around $66. Since then, Scotia’s shares have surged almost 25 per cent.
Indeed, in mid-October, Hamilton Capital Partners said banks could be equipped to raise their dividends as much as 25 per cent.
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 pegs 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.
The announcement on Thursday will be the most significant for OSFI since Peter Routledge took the reins as its superintendent in June.
On the day he took office, Routledge made it clear he wouldn’t be rushed into lifting the capital restrictions.
““[The Office of the Superintendent of Financial Institutions] has long stated, and I repeat, that we’ll continue to err on the side of being a little late in lifting the restrictions as opposed to a little early,” he said in an interview.
“Please, I’d ask folks, be patient. OSFI does have track record of having reasonably good judgment in that regard.”