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Why bank dividend hikes may not be on a grand scale

The Globe and Mail

Demonstrators march to protest government austerity measures in Greece Sept. 11 (LOUISA GOULIAMAKI)

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OSFI unleashes Canadian banks Canada's bank regulator is unleashing the major banks from restrictions that had been aimed at preserving capital, allowing them to resume dividend increases, share buybacks and acquisitions. The Office of the Superintendent of Financial Institutions had held the banks to restrictions during the financial crisis, but after a weekend meeting of regulators in Basel, Switzerland, is freeing their hand. The central bankers and regulators met on the weekend and agreed to new capital rules with a phase-in period. The Canadian banks are expected to have no issues meeting the new requirements.

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In a statement on its website last night, OSFI said it still expects "sound capital management" by the country's deposit taking institutions "but will no longer require the increased conservatism in capital management" that it announced in late 2008.

Superintendent Julie Dickson had signalled this in an interview with Globe and Mail banking reporter Grant Robertson last week, surprising analysts who had expected the freedom would come later.

While analysts aren't necessarily expecting share buybacks, they are anticipating dividend increases. Last week, after Mr. Robertson's article, analyst Andre-Philippe Hardy of RBC Dominion Securities said Toronto-Dominion Bank and National Bank of Canada would be in a position to move first.

Today, though, National Bank Financial warned investors not to expect too much now that the handcuffs are off. Canada's banks are well-capitalized as far as the new rules are concerned, but they aren't over-capitalized, it said.

"A windfall of share buybacks, acquisitions, or exceptionally large dividend raises are not around the corner for bank investors. Rather ... this week's reformed bank capital rules herald a new 'phase' in Canadian banking, as opposed to a new 'era.' We expect banks to proceed cautiously on all new capital actions such as dividend raises, share buybacks, and acquisitions. For starters, we project small, 2-4 per cent increases in dividends at each of Canada's banks by the first half of [fiscal]2011. Acquisitions and buybacks will follow but we expect them to be constrained by continuing developments on the regulatory front.

"... Canada's Big Six banks are in a position of capital strength, one which they may wish to lever for the benefit of their shareholders. Outside the bounds of prudent, sustainable capital management, we believe the regulator will seek to stay out-of-the-way of bank decision-making in this regard. At the same time we expect bank boards to continue to be respectful of the regulator's mandate to maintain a well-capitalized, stable banking system."



Carney's version of the new bank rules Bank of Canada Governor Mark Carney is promoting the new Basel III bank capital rules in a speech in Berlin today, lauding the benefits and discussing the costs. There are several steps banks can take to meet the new rules, which will be phased in, Mr. Carney said in a speech at the German central bank. They could raise capital in the markets or, in time, generate what's needed internally through retained earnings. They could also pass on some of the costs to customers through higher interest spreads or higher fees, he added, or shed assets.

"Past experience suggests that banks will use a combination of all these methods," Mr. Carney said in the text of the remarks. "However, to be conservative, the Basel report assumes that banks would recoup the cost of higher capital and liquidity requirements entirely through higher lending spreads.

"...Banks are assumed to fully pass on the costs of higher capital and liquidity requirements to borrowers rather than reducing their current returns on shareholders' equity or operating expenses, such as compensation, to adjust to the new rules. Consider the alternative. If banks were to reduce personnel expenses by only 10 per cent (equal to a 5 per cent reduction in operating expenses), they could lower spreads by an amount that would completely offset the impact of a 2-percentage-point increase in capital requirements."



Greece loses young people Greece is losing a growing number of bright, young graduates to the recession and tremendous debt troubles. A recent survey showed seven out of 10 college graduates in Greece want to work outside its borders, and four of 10 are actually looking or getting more education that would allow them to do that, The New York Times reports. In an indepth look at the troubles of Greece and its work force, the newspaper says some people are leaving because choices are dwindling, or they never had them in the first place. The Greek government has unveiled harsh austerity measures to deal with its debt crisis, while various scandals have left many disillusioned. The Times cites the fact that the jobless rate for 15- to 25-year-olds is almost 30 per cent, and among 25- to 34-year-olds more than 16 per cent.



Productivity sags Labour productivity in Canada is sagging again, sinking 0.8 per cent in the second quarter of the year following several months of an uptick. "The productivity decline in the second quarter reflected a slowdown in business output, combined with a rise in hours worked," Statistics Canada said today.

The federal statistics gathering agency noted that productivity fell faster than hourly pay, meaning unit labour costs in Canada rose 0.5 per cent for the first quarterly increase in a year. Productivity - real GDP per hour worked - comes amid modest growth in GDP and a huge increase in the number of hours worked.

One quarter of softer productivity doesn't signal all that much, simply that employment rose faster than output, said BMO Nesbitt Burns deputy chief economist Douglas Porter. But overall slow productivity growth, as Canada has experienced over the past decade, means "we're not getting as much out of our workers."

Having said that, he added, what Canada has given up in productivity has been gained back in employment growth, particularly when compared to the U.S.

"Labour productivity growth in Canada has largely been a depressing story in recent years and this quarter's data simply continues this theme," added Toronto-Dominion Bank economist Francis Fong. "For most of the last decade, productivity growth has slowed to a crawl, averaging less than 1 per cent on an annual average basis which has caused Canada to slip significantly in the competitiveness rankings among its advanced counterparts. Going forward, we expect a shift in the driver of the Canadian economic recovery away from job growth, which has been extremely strong thus far and will moderate, towards capital deepening and business investment which should help boost productivity growth."

At the same time, Statistics Canada said, the manufacturing sector is rebounding from the recession. Capacity utilization in the second quarter climbed to 76 per cent, well up from the low of about 68 per cent a year earlier.

What the two reports suggest, Mr. Porter said, is that the recovery is progressing but "is relying heavily on sweat and toil and not brains and innovation."

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Green Mountain to acquire Van Houtte Green Mountain Coffee Roasters Inc. is expanding in Canada with a $915-million takeover of Van Houtte Inc. The company, based in Waterbury, Vt., said it would acquire Van Houtte from private equity player Littlejohn & Co., which bought Van Houtte in 2007 as part of an investor group. Green Mountain, which owns the Timothy's chain, among others, has had a relationship with Van Houtte since 2001 when the Canadian company became a licensee for its Keurig single-cup brewing system.

"This acquisition will enhance GMCR's Canadian presence and is expected to strengthen our North American geographic expansion with a well-known Canadian brand platform that includes roasting, manufacturing and distribution capabilities," chief executive officer Lawrence Blanford said in a statement.



Telus not looking at media assets Telus Corp. says it's not planning to join its rivals in the industry in buying up media assets. BCE Inc. has struck a deal for full ownership of CTV Inc. while Shaw Communications Inc. is buying the television assets of CanWest Global. But Telus chief commercial officer Joe Natale said today the carrier doesn't believe telecommunciations companies must own content in order to provide it. "Our core competency is not producing content," he said at a conference. "Our goal is to aggregate and collect the best of that content whether it comes from capabilities in Canada, the U.S., or internationally," Natale said.



U.S. shoppers pick up U.S. shoppers sprang to life for the back-to-school season, boosting retail sales at the fastest pace in five months and, perhaps for now, calming fears of a double-dip recession in the world's biggest economy. The U.S. Commerce Department said today retail sales climbed 0.4 per cent in August. If you factor out a big drop in auto sales, sales rose 0.6 per cent.

"The 0.4-per-cent month-over-month gain in U.S. retail sales in August suggests that the household sector is far from firing on all cylinders, but nor is consumption collapsing," said Paul Dales, U.S. economist at Capital Economics in Toronto. "... Clearly household spending is not capitulating, but it is still being hampered by high unemployment, widespread negative equity and a desire to pay down debt."



Could BHP hold off on Jansen? A fertilizer consulting company believes BHP Billiton Ltd. could delay its Jansen project in Saskatchewan if it succeeds in its quest for control of Potash Corp. of Saskatchewan . It would cost less to expand nearby Potash projects than develop the Jansen property, Barrie Bain of Fertecon said today on a conference call, Bloomberg News reports. BHP has already pumped $1-billion (U.S.) into the Jansen project, and more than $10-billion more may be needed, analysts have estimated.

"They've said they will continue to develop that," Mr. Bain said. "My view is that they will put it on the back boiler and look to develop that beyond 2020. Potash Corp. has got the potential for substantial expansions at much lower cost."



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