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Bank dividends must rise Add to ...

There is a strong argument that Canada's banks will have to boost their dividends by some time next year to meet their own targets for dividend payout ratios (i.e., dividends per share as a percentage of earnings per share).

The Basel III global financial-sector reforms are expected by the end of November, and TD Securities analyst Jason Bilodeau says the new capital standards should be manageable for Canada's banks.

In a note this week, he writes that the banks will likely begin to raise their dividends on a regular basis again shortly afterwards, possibly in the fourth quarter of this year, but more likely in the first quarter of 2011. Hikes have been frozen since the third quarter of 2008.

"We believe that each of the banks gave an implicit nod to growing their dividend in 2011 once they have greater clarity around the new regulatory capital standards. We do not expect any catch-up (i.e., a dramatic hike) to account for the pause that the group has taken since Q3/08. Rather, we expect a return to a pattern of incremental dividend hikes every other quarter or so," he wrote.

Mr. Bilodeau's calculations show a significant difference in the banks' dividend payout ratios at their current levels. National Bank's 2010 payout ratio of 40 per cent is the lowest of the group, followed by Bank of Nova Scotia (51 per cent), Royal Bank (52 per cent), CIBC (55 per cent), and Bank of Montreal (59 per cent).

Applying Mr. Bilodeau's share profit estimates for 2011, the payout ratios shrink further when using today's dividends.

National Bank's slides to 37 per cent, compared with the bank's own target of between 40 per cent and 50 per cent.

Bank of Nova Scotia's falls to 43 per cent, compared with a target of between 35 per cent and 45 per cent.

Royal Bank's payout ratio declines to 44 per cent, next to a stated target of between 40 per cent and 50 per cent.

CIBC's ratio decreases to 50 per cent, within the bank's own target range of 40 per cent to 50 per cent.

And BMO's payout ratio slips to 51 per cent, compared with a target range of between 45 per cent and 55 per cent.

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