Lorne Steinberg discusses BMO vs. CIBC
With another earnings season just around the corner, a veteran analyst said investors should count on a flurry of dividend hikes from Canada's lenders.
"On the capital front, with no change to dividend policies in [the previous quarter], we expect a bonanza of dividend hikes, while low share prices could drive more share buybacks in the quarter," wrote John Aiken, Barclays' head of research for Canada, in a report to clients Wednesday.
Canada's banks were prevented from raising their dividends or buying back shares from March 2020 until early November 2021 as their regulator, the Office of the Superintendent of Financial Institutions (OSFI), sought to shield Canada's financial system from a feared surge in insolvencies as a result of the pandemic.
But the financial devastation never hit the banks' loan books to the extent that some observers feared, and so OSFI unshackled the sector on Nov. 4, prompting an initial wave of dividend hikes and buybacks in the ensuing weeks.
Aiken stated he expects all the banks other than TD Bank Group, which he anticipates will review its payout strategy later this year, will announce dividend hikes when they report results in the coming weeks.
He singled out National Bank of Canada as being positioned for the most generous hike, which he estimates at a 22 per cent increase (from the current level of $0.87 per share), since it has the lowest payout ratio and what he described as "relatively solid excess capital levels."
Aiken said he expects low-to-mid single digit dividend boosts from the other banks. He acknowledged that Bank of Montreal's payout ratio is currently narrowly below the bank's target and that it has a hefty capital buffer (with Common Equity Tier 1 ratio at 14.1 per cent versus the required 10.5 per cent), but he anticipates the bank will only raise its dividend two per cent as it seeks to preserve capital while attempting to close its takeover of Bank of the West in the United States.
And with bank stocks recently coming under pressure amid the broader market downturn, Aiken said banks are well-positioned to be "active and opportunistic" scooping up their shares. He noted the stocks are cheap in historical context, as they trade at a forward price-to-earnings multiple of 9.7 versus the 20-year average of 11.2. As a result of the volatility, Aiken lowered his price targets on all of the banks he covers. The sharpest mark down was on Canadian Imperial Bank of Commerce; where Aiken cut his target 21 per cent to $143.00 from $180.00.
As for the quarter, Aiken estimates earnings among the Big Six banks will fall an average of 9.2 per cent quarter-over-quarter. He pinpointed BMO as facing the sharpest sequential drop-off (16.6 per cent), while TD's profit is estimated to dip 0.2 per cent from the previous quarter. Compared to a year earlier, Aiken estimates average profit growth of 1.5 per cent.
In his report, Aiken noted rising interest rates are a "double edged sword" since they bolster margins while threatening to slow mortgage activity. He also stated he expects capital markets revenue will moderate, and credit quality could surprise to the upside since Canada's labour market has recovered to pre-pandemic levels.
"While the recent market volatility has tested the banks' reputation as a 'relative safe place to hide', we believe the banks have strong capital and reserve levels to weather the storm," Aiken wrote.
Here’s when the Big Six banks are scheduled to release their fiscal second-quarter results:
- May 25: BMO, Bank of Nova Scotia
- May 26: Royal Bank of Canada, TD, CIBC
- May 27: National Bank