TORONTO- Canada’s top six banks are expected to resume raising dividends and share buybacks after nearly a two-year hiatus and report strong quarterly earnings this week, which could boost the sector’s appeal to yield-hungry investors even as stocks trade close to all-time highs.
The market will also be looking for clues on the banks’ expected expense growth into next year as wage pressures intensify, and long-awaited improvements in net interest margins as interest rates rise.
The “big six” Canadian banks – Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia (Scotiabank), Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada – on average have a dividend yield of 3.3 percent, according to Reuters calculations.
That compares with the global sector median of 2.5 percent, according to Refinitiv data.
The dividend increases, which would be the first since the country’s financial regulator imposed a moratorium in March 2020 that was lifted earlier this month, could range from 10 percent for Scotiabank at the lower end to 34 percent at National Bank, Gabriel Dechaine, an analyst at National Bank Financial, wrote in a Nov. 22 note describing the coming hikes as a “dividend growth tsunami.”
The banks are also expected to announce repurchases of about 2 percent of their outstanding shares on average.
“It’s going to be a significant (dividend) increase, and will help them reduce excess capital on their balance sheets,” said Steve Belisle, portfolio manager at Manulife Investment Management. “That flows through to better ROE (return on equity).”
Even without the higher dividends or buybacks, Canadian bank shares have rallied to record highs, driven in part by better-than-expected earnings due to the release of reserves set aside to cover loan losses that haven’t materialized.
The Canadian banks will be reporting their fourth-quarter earnings, with Scotiabank kicking off the results on Tuesday.
Analysts expect adjusted earnings for the top six lenders to jump about 37 percent from the year-earlier period, helped by a pick-up in business and credit card lending, strong mortgage growth and continued reserve releases.
An acceleration in loan growth is expected, as savings built up during the COVID-19 pandemic have lifted consumers’ and businesses’ purchasing power even at higher prices, with the broader economic recovery adding fuel to the fire, said Philip Petursson, chief investment strategist at IG Wealth Management.
