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Bank buildings are photographed in Toronto's financial district on June 27, 2018. When The Big Six banks announce earnings for their fiscal fourth quarter next week, dividends could rise by an average of 20 per cent, according to analysts.Tijana Martin/The Canadian Press

Canada’s major banks are set to announce their first dividend increases and share buybacks in nearly two years next week and eager investors are awaiting generous hikes to payouts, but the size and timing are expected to vary widely from one bank to another.

The Big Six banks are expected to play catch-up on distributing capital starting on Nov. 30, when they announce earnings for their fiscal fourth quarter, and dividends could rise by an average of 20 per cent, according to analysts.

Not all bank shareholders will benefit equally, however. Dividend increases could be as generous as 25 per cent or more at National Bank of Canada and Bank of Montreal, and as modest as 5 per cent to 10 per cent at Bank of Nova Scotia, according to analysts’ estimates. The gulf is mostly explained by differences in the speed at which each bank’s earnings have bounced back from COVID-19 lows, and how generous their payouts were before the pandemic.

It is also unclear whether the catch-up dividend hikes and new share repurchase programs will come all at once with the banks’ results for their fiscal year ended Oct. 31. Paul Holden, an analyst at CIBC World Markets Inc., speculated in a note to clients that BMO and National Bank could increase dividends enough to bring them up to the low end of their typical payout range, then announce “another generous increase two quarters later.”

Canada’s banking regulator recently lifted pandemic-related restrictions that had prohibited dividend hikes or share buybacks since March, 2020. While the largest banks were unable to raise payouts to shareholders, they amassed an estimated $31.4-billion in extra capital, above regulatory minimums.

When the Office of the Superintendent of Financial Institutions (OSFI) lifted its temporary freeze on dividends and buybacks earlier this month, Superintendent Peter Routledge warned banks to act with “humility and prudence” – which was widely interpreted as advising senior bankers not to get carried away when returning capital to shareholders.

Within days, however, the country’s two largest insurers, Sun Life Financial Inc. and Manulife Financial Corp., hiked quarterly dividends by 20 per cent and 18 per cent, respectively.

“We had originally anticipated a multiquarter pace to move [banks’] payout ratios to the midpoint of 40 to 50 per cent target ranges,” said Gabriel Dechaine, an analyst at National Bank Financial Inc., in a note to clients. “Given what we saw from the Canadian lifecos recently, we believe the timeline is much shorter.”

Plans for share buybacks are likely to be more modest, but low expectations leave room for surprises. Some banks may revert to typical repurchase plans that target 1 per cent to 2 per cent of outstanding shares, and others might buy back as much as 4 per cent. BMO is expected to announce one of the larger buyback plans, while Scotiabank, TD and RBC could all buy back shares more aggressively if they choose to.

“We believe investors should focus on buybacks in particular and think that market expectations remain very modest in this regard,” said Meny Grauman, an analyst with Scotia Capital Inc.

More broadly, banks are expected to report good financial results to cap off a year of outsized profits magnified by the contrast against pandemic lows in 2020. Earnings per share could fall 4 per cent to 6 per cent when compared with elevated levels in the fiscal third quarter, but that would still be up about 29 per cent year over year, according to Darko Mihelic, an analyst at RBC Dominion Securities Inc.

Scotiabank is first to report on Nov. 30, followed by RBC and National Bank on Dec. 1, TD and CIBC on Dec. 2, and BMO on Dec. 3.

Demand for loans, which has been sluggish for much of the year, is expected to improve, with balances rising 1.8 per cent from the previous quarter and 5.1 per cent from a year ago, Mr. Mihelic said. But mortgages are still driving much of that increase, fuelled by shortages in housing supply and low interest rates, and deposits are still increasing faster than loans.

Losses from loan defaults should still be low, and banks are likely to continue releasing some of the large allowances against loan losses that they built up early in the pandemic, which boosts their profits. Pressure on profit margins from lending may also ease: Net interest margins are expected to remain steady in the fourth quarter, and could expand in future quarters if central banks hike interest rates in 2022, as predicted.

Results for the banks’ capital markets operations could be mixed. Profits may retreat from lofty third-quarter levels, but are still expected to be stronger than they were a year ago. League table data suggest the pace of corporate mergers and acquisitions, as well as equity issuances, cooled in the fourth quarter, but was still higher year over year.

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