Skip to main content
The Globe and Mail
Support Quality Journalism.
The Globe and Mail
First Access to Latest
Investment News
Collection of curated
e-books and guides
Inform your decisions via
Globe Investor Tools
Just$1.99
per week
for first 24 weeks

Enjoy unlimited digital access
Cancel Anytime
Enjoy Unlimited Digital Access
Get full access to globeandmail.com
Just $1.99per week for the first 24weeks
Just $1.99per week for the first 24weeks
var select={root:".js-sub-pencil",control:".js-sub-pencil-control",open:"o-sub-pencil--open",closed:"o-sub-pencil--closed"},dom={},allowExpand=!0;function pencilInit(o){var e=arguments.length>1&&void 0!==arguments[1]&&arguments[1];select.root=o,dom.root=document.querySelector(select.root),dom.root&&(dom.control=document.querySelector(select.control),dom.control.addEventListener("click",onToggleClicked),setPanelState(e),window.addEventListener("scroll",onWindowScroll),dom.root.removeAttribute("hidden"))}function isPanelOpen(){return dom.root.classList.contains(select.open)}function setPanelState(o){dom.root.classList[o?"add":"remove"](select.open),dom.root.classList[o?"remove":"add"](select.closed),dom.control.setAttribute("aria-expanded",o)}function onToggleClicked(){var l=!isPanelOpen();setPanelState(l)}function onWindowScroll(){window.requestAnimationFrame(function() {var l=isPanelOpen(),n=0===(document.body.scrollTop||document.documentElement.scrollTop);n||l||!allowExpand?n&&l&&(allowExpand=!0,setPanelState(!1)):(allowExpand=!1,setPanelState(!0))});}pencilInit(".js-sub-pencil",!1); // via darwin-bg var slideIndex = 0; carousel(); function carousel() { var i; var x = document.getElementsByClassName("subs_valueprop"); for (i = 0; i < x.length; i++) { x[i].style.display = "none"; } slideIndex++; if (slideIndex> x.length) { slideIndex = 1; } x[slideIndex - 1].style.display = "block"; setTimeout(carousel, 2500); } //

Growing cash piles at Canada’s big banks are raising expectations for substantial dividend increases when regulators give banks clearance to resume hikes.

How substantial? An early indication from Royal Bank of Canada suggests that the boost could be big – as in, nearly 30 per cent. At National Bank of Canada, the boost could be 17 per cent or more.

Canada’s Big Six have maintained their quarterly payouts during the pandemic, but haven’t been able to raise them. That’s because the main banking regulator, the Office of the Superintendent of Financial Institutions (OSFI), imposed restrictions on the banks in March, 2020, when pandemic-related lockdowns began and the economy went into a tailspin.

Story continues below advertisement

OSFI wanted to ensure the banks had enough liquidity to keep lending and handle a potential wave of loan defaults if the economy continued to struggle. So, the banks couldn’t raise their quarterly dividends or buy back their own shares.

The good news for everyone: The economy is recovering, the lending taps are open and defaults (so far) have been less than expected.

The great news for investors: The cautious approach over the past year has left the banks holding enormous amounts of excess capital above what regulators require.

Some of this cash will likely flow to shareholders in the form of higher dividends when the pandemic subsides and OSFI gives the go-ahead. During the fiscal second-quarter reporting season this week, some bank executives dropped tantalizing hints about what these higher dividends could look like.

“When regulatory restrictions are lifted, we will look to accelerate capital return to our shareholders through a mix of share buybacks and higher dividends, given our payout ratio is at the bottom end of our 40- to 50-per-cent range,” Dave McKay, RBC’s chief executive officer, said during a conference call with analysts on Thursday.

He added that various operational tailwinds “give us confidence in our core earnings and our ability to move that payout ratio back up to the top end of the range.”

The underlying numbers suggest dividend increases could be big. RBC has been paying a quarterly dividend of $1.08 a share, or $4.32 annually, throughout the pandemic. Analysts estimate, on average, that RBC will generate a profit of $11.20 a share in 2021. Comparing the current distribution to the estimated profit means that today’s payout ratio is under 40 per cent.

Story continues below advertisement

If RBC boosted the distribution to the top end of its payout ratio – or 50 per cent, as Mr. McKay suggested – the annualized distribution would rise to $5.60 a share if profit estimates rang true. That implies an increase of $1.28 a share, or nearly a 30-per-cent boost to the current dividend.

Under this hypothetical scenario, RBC’s dividend yield, which compares the annual distribution to the share price, would rise from 3.5 per cent to 4.5 per cent.

Other banks are in similar situations, given that excess cash is a sector-wide issue.

“We should be in a good position to increase dividends, probably even quite substantially on a recurring basis, once we get the green light from regulators,” Louis Vachon, National Bank of Canada’s CEO, said during a call with analysts on Friday.

Though National Bank’s payout ratio is just 34 per cent right now, Mr. Vachon would like to raise the dividend to return the payout ratio to a range between 40 per cent and 50 per cent. Based on 2021 profit expectations, that implies a dividend increase of 49 cents a share on a current annualized distribution of $2.84 a share.

That’s a 17-per-cent boost to the dividend, and it only lifts the payout ratio to the low end of National Bank’s target range.

Story continues below advertisement

The question about when dividend hikes will resume remains open. But the question about what these hikes will look like is getting the answer investors should applaud.

Full disclosure: The author owns units of the BMO Equal Weight Banks Index ETF.

With a file from James Bradshaw

Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.

Your Globe

Build your personal news feed

  1. Follow topics and authors relevant to your reading interests.
  2. Check your Following feed daily, and never miss an article. Access your Following feed from your account menu at the top right corner of every page.

Follow the author of this article:

Follow topics related to this article:

View more suggestions in Following Read more about following topics and authors
Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

If you do not see your comment posted immediately, it is being reviewed by the moderation team and may appear shortly, generally within an hour.

We aim to have all comments reviewed in a timely manner.

Comments that violate our community guidelines will not be posted.

UPDATED: Read our community guidelines here

Discussion loading ...

To view this site properly, enable cookies in your browser. Read our privacy policy to learn more.
How to enable cookies