Canada should not join global trend of pressuring financial institutions, policy experts argue
In their most recent earnings reports, Canada’s banks have reported soft second-quarter earnings, with Laurentian Bank announcing a cut in its dividends. That might be wise, considering how dividend-paying companies are under increased pressure from critics who contend that such payments are unsustainable and imprudent.
Elsewhere in the world, the coronavirus crisis has added to that pressure. The European Central Bank has called on Europe’s banks to suspend dividends until fall; Australia’s regulator has recommended a “prudent reduction in dividends.” And some commentators have argued that U.S. banks should cut dividends now just as they did in the 2008-2009 financial crisis.
But according to Jeremy M. Kronick and William B.P. Robson of the C.D. Howe Institute, Canada’s regulators should refrain from hopping on that particular bandwagon.
In a think piece published by the Financial Post, Kronick and Robson noted that recent criticisms of dividend payments have been lobbed at companies receiving support from the government to stay afloat. Given the Bank of Canada’s injections of liquidity into the financial system and extraordinary asset purchases to support credit markets, they said some may be tempted to paint the country’s banks with the same brush.
But the two explained that BoC’s recent moves aren’t aimed at propping up banks, but to use them as “channels of assistance” to keep the broader economy running. In line with that, the Office of the Superintendent of Financial Institutions (OSFI) announced early on that financial institutions could regard mortgage deferrals as performing loans, and eased a key buffer requirement in order to give them $300 billion in additional lending room.
“Both OSFI’s moves and the federal government’s credit supports in partnership with private lenders will work better if the private lenders are making decisions on the basis of their own assessments of risks and rewards, including the risks and rewards of those decisions for their shareholders,” Kronick and Robson said.
They also proposed that in today’s fragile economy, dividend flows from banks have become crucial for Canada’s individual and institutional investors. The Big Six banks accounted for a reported 30% of all dividends paid by TSX-listed companies earlier this year, and that share has most likely risen as energy companies have cut their dividends.
While the weakened second-quarter earnings might suggest a need to for reduced dividends on their face, Kronick and Robson pointed out that Canada’s big banks have reported an average return on equity near 16% in the quarter before that, comfortably topping figures in other advanced economies.
