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To restore typical levels of shareholder payouts, a Canaccord Genuity Group analyst estimates dividends would need to increase 38 per cent at National Bank and 32 per cent at BMO.Nathan Denette/The Canadian Press

Canada’s banking regulator plans to make an announcement Thursday about “capital distributions” for federal financial institutions, raising investors’ hopes that it is poised to lift or relax a temporary ban on banks and insurers increasing dividends or buying back shares.

The Office of the Superintendent of Financial Institutions (OSFI) put the moratorium in place in March, 2020, to ensure that banks could preserve capital as the pandemic hobbled the global economy. But massive government stimulus spending, combined with payment deferrals that banks granted on loans, softened the impact of the crisis on financial institutions, and banks are now sitting on tens of billions of dollars of excess capital.

Executives at several major banks have said they intend to catch up by hiking quarterly dividends more rapidly than usual, and some will buy back shares once they are allowed to do so. That has bank shareholders anticipating a potential windfall.

“We assume that the restrictions currently in place will be lifted or, at least, a timeline thereof will be provided,” said Gabriel Dechaine, an analyst at National Bank Financial Inc., in an e-mail.

Peter Routledge, who was appointed to lead OSFI in June, said at the time that “it’s better to err on the side of keeping these restrictions on a bit too long than unwinding them a bit early,” echoing a cautious stand adopted by his immediate predecessor, Jeremy Rudin.

Mr. Dechaine estimates that Canada’s six largest banks have a combined $43.5-billion in extra capital – above the minimum amounts the regulator requires them to hold.

The major banks’ common equity Tier 1 (CET1) ratios – which measure a bank’s capital reserves and are a key barometer of resilience – have been steadily rising through the pandemic and now average 13.1 per cent. Toronto-Dominion Bank leads the group at 14.2 per cent, Bank of Montreal is at 13.7 per cent, and Royal Bank of Canada is at 13.6 per cent as of July 31. OSFI requires a ratio of at least 10.5 per cent.

Banks will want to use some of that capital to invest in their existing businesses, and some may want to pursue acquisitions. But as a group they have sufficient capital and profit to support dividend increases of 20 to 25 per cent on average over the coming quarters, said Rob Wessel, managing partner of Hamilton Capital Partners, in a recent note to clients.

“There is simply no policy justification for the moratorium to continue,” Mr. Wessel wrote.

The banks with the most catching up to do may be National Bank of Canada and BMO, according to Scott Chan, an analyst at Canaccord Genuity Group Inc. To restore typical levels of shareholder payouts, he estimates dividends would need to increase 38 per cent at National Bank and 32 per cent at BMO.

RBC would have to raise its quarterly dividend 16 per cent to reach the midpoint of its payout ratio. TD and Canadian Imperial Bank of Commerce would need smaller increases, while Bank of Nova Scotia is already within its preferred range, according to Mr. Chan.

At a September conference hosted by Barclays, BMO chief financial officer Tayfun Tuzun told analysts he was “quite optimistic” the bank would get back on track with its dividend payout ratio.

“It could take one or two moves, but it will be a quick catch-up period,” Mr. Tuzun said. “And dividends alone will not get us back to the targeted capital ratios, so there’s clearly going to be some buybacks associated with it.”

Share buybacks could be more restrained. Some analysts predict banks may simply pick up where they left off with plans to repurchase less than 2 per cent of outstanding shares. “We believe banks could be concerned about public perception of much larger buyback programs,” Mr. Dechaine said.

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