So much for relying on the Big Six to boost your RRSP.
Since the start of the year, the S&P/TSX bank index is up just 3 per cent, leaving investors who rely on these institutions for returns incredibly underwhelmed. The S&P 500, by contrast, has soared 17 per cent.
What gives? Apparently investors are being prudent and pricing in an eventual lending slowdown. Quarter after quarter the banks have surprised with solid profits, but it looks like investors assume the fundamentals will ultimately catch up with the Big Six.
In fact, the numbers already show softer lending books. "After nearly three years of lead time the slowdown in domestic consumer loan volumes is clearly here," Macquarie Securities analyst Sumit Malhotra noted.
"This does not mean that the group can no longer grow [earnings per share]; it just means that a greater portion of that growth is now reliant on inherently riskier components," he added.
However, Mr. Malhotra doesn't think that adding risk to boost earnings is the only way to woo investors back. Instead, the banks can be smart about it.
"The best option available to the banks to shift the narrative away from the 'Housing! Consumer! Consumer! Housing!' talking points that have dominated sentiment is to get more aggressive / creative in deploying their strong capital position," he wrote.
Because the banks are sitting pretty when it comes to capital, why not return some of it to their shareholders?
Now, they already have. Big Six have raised dividends and National Bank of Canada is expected to raise again this coming quarter. The banks have also been buying back shares. But Mr. Malhotra thinks there's more room for payouts.
"Though dividend growth has kept pace with EPS … having watched the Australian banks be handsomely rewarded by the market for stepping up the return of capital, in a likely slower growth period we think the opportunity exists to move to give more back to shareholders," he wrote.
Plus, he points out that in this market yield is everything. Just look at the stock price of REITs and Canadian telcos for proof.
If Royal Bank of Canada can churn out a $2.1-billion quarterly profit again, could a special dividend really hurt the bank all that much?
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(Tim Kiladze is a Globe and Mail Capital Markets Reporter.)
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