Following initial wave of hikes and buybacks, Big Six seen as well-positioned to be 'active and opportunistic'
With another earnings season approaching, a seasoned analyst predicts a frenzy of dividend increases from Canada's banks.
According to BNN Bloomberg, Barclays' head of research for Canada, John Aiken, believes the Big Six banks are well placed to return even more value to their shareholders.
"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," Aiken’s note read.
From March 2020 to early November 2021, Canadian banks were prohibited from increasing dividends or buying back stock as their regulator, the Office of the Superintendent of Financial Institutions (OSFI), sought to protect the country's financial system from a feared surge in insolvencies caused by the pandemic.
However, the financial meltdown did not have the same impact on banks' loan books as some had predicted, and OSFI released the industry on Nov. 4, spurring an initial wave of dividend raises and buybacks in the weeks that followed.
All the big banks – save TD Bank Group, which Aiken expects to reconsider its distribution plan later this year – will announce dividend increases when they report results in the coming weeks, according to Aiken.
Because it has the lowest payout ratio and "quite solid surplus capital levels," he believes National Bank of Canada is positioned for the most generous boost, which he estimates at a 22% increase (from the present level of $0.87 per share).
The other banks will likely increase their dividends in the low- to mid-single digits, according to Aiken.He acknowledged that Bank of Montreal's payout ratio is currently just below its target and that the bank has a sizable capital buffer (Common Equity Tier 1 ratio of 14.1% versus the required 10.5%), but he expects the bank to only raise its dividend by 2% as it tries to close its takeover of Bank of the West in the United States.
With bank equities under pressure due to the larger market slump, Aiken believes banks are ideally positioned to be "aggressive and opportunistic" in their stock purchases.
He pointed out that the equities are cheap in historical terms, with a future price-to-earnings ratio of 9.7 compared to the 20-year average of 11.2. Aiken cut his price targets on all of the banks he covers as a result of the volatility. He decreased his objective by 21% to $143.00 from $180.00 on Canadian Imperial Bank of Commerce.
In terms of earnings for the quarter, Aiken expects the Big Six banks to lose 9.2% on average year over year. BMO is expected to experience the largest consecutive loss (16.6%), while TD's profit is expected to fall 0.2% from the previous quarter. He anticipates a 1.5% increase in average profit over the previous year.
"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 concluded.
