Bank headquarters in downtown Toronto.
Canada’s banking regulator is immediately lifting pandemic-related restrictions that prevented banks and insurers from raising dividends and buying back shares, but is urging bank executives to act responsibly as they deliver long-awaited payouts to investors.
On Thursday, the Office of the Superintendent of Financial Institutions put an end to temporary measures that had prohibited dividend hikes and share buybacks by financial institutions since March, 2020. The restraints were intended to force financial institutions to preserve capital so they could continue making loans in the early stages of the COVID-19 crisis.
The head of the OSFI, Peter Routledge, said in an online speech that the financial and economic risks posed by the COVID-19 pandemic “have abated somewhat.”
Government stimulus measures and banks’ own programs to defer loan payments for hundreds of thousands of clients cushioned the pandemic’s impact on the financial sector, leaving institutions unusually flush with capital. Banks have now stockpiled tens of billions of dollars, and quarterly profits have rebounded from pandemic lows.
Although the capital restrictions “were prudent and effective over the past year and a half, they are no longer necessary,” Mr. Routledge said. The OSFI also lifted a temporary ban on banks and insurers raising executive compensation on Thursday.
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Banks are expected to begin buying back shares soon and to raise quarterly dividends faster than usual to catch up with their normal payout ratios, which are typically between 40 and 50 per cent of earnings. Major banks “could go beyond their usual conservative stance, and reward investors with a more aggressive bias for dividend hikes and share buybacks,” said John Aiken, an analyst with Barclays Capital Canada Inc., in a note to clients.
Mr. Routledge, who was appointed OSFI superintendent in June, said capital decisions rest with the directors and executives of financial institutions, and that the regulator is confident they will “act responsibly.” But he also fired a warning shot that could temper the pace of the anticipated payouts. On a conference call with reporters, he urged top bankers and board members to proceed with “humility and prudence,” and reminded them “that not everyone performed as well or had as prosperous an experience through COVID-19 as some of our largest financial institutions.”
“I would hope that good management that was so effective during the crisis would also translate into good, responsible decision-making in the context we find ourselves,” he said.
Darko Mihelic, an analyst at RBC Dominion Securities Inc., estimates that banks will raise dividends by an average of 18 per cent by the second fiscal quarter of 2022, and buy back a “modest” 2 per cent of their shares in the coming year. He calculates that banks have a combined $31.4-billion of extra capital, above the minimum amounts the regulator requires them to hold.
“We believe the Canadian banks and lifecos ... will need to consider the optics of a significant dividend increase or capital return as it may not be greeted warmly by OSFI,” Mr. Mihelic said in a note to clients. “This may translate into expectations that the Canadian banks and lifecos may increase dividends but should not engage in aggressive high double-digit increases at the first opportunity.”
Spokespeople for Canada’s six largest banks declined to comment. Banks will likely announce capital plans when they next report quarterly earnings, in late November and early December, Mr. Mihelic said.
Mr. Routledge is no stranger to the banks’ strategies for managing capital, having spent much of his career analyzing and rating financial institutions. As head of the OSFI, he has vowed to bring greater urgency to the regulator’s oversight of the financial sector on pressing issues such as climate change and emerging technologies.
In deciding to lift the restrictions, he said, the OSFI considered the very low actual losses banks have had on defaulting loans, and the fact that banks have been releasing some of the provisions set aside early in the crisis to guard against losses. The regulator was also reassured when nearly all of hundreds of thousands of bank clients who were granted six-month mortgage deferrals early in the crisis were able to resume making payments. And the OSFI took note that even with a summer spike in COVID-19 cases and hospitalizations, banks remained stable.
“That indicated to us that ... from a financial lens, it appears the pandemic is becoming more of an endemic issue,” Mr. Routledge said.
Some analysts criticized the regulator for not lifting the cap on dividends and share buybacks sooner. While banks had their hands tied, 92 TSX companies raised dividends, with a median increase of 14 per cent, according to Mr. Mihelic. The U.S. Federal Reserve lifted similar restrictions on banks in June, and 14 top U.S. banks have announced median dividend hikes of 11 per cent since then. But Mr. Routledge said the OSFI preferred to wait and see how a summer surge in COVID-19 infections played out, and that the regulator felt waiting a few more months “wouldn’t hurt the system.”
“If I were going to get criticized as superintendent, I’d rather be criticized for being a little too careful than a little too reckless, so I’ll wear the criticisms with a badge of pride,” Mr. Routledge said. “It was a risk appetite judgment that, in hindsight, we’re pretty happy with.”
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James Bradshaw