Toronto-Dominion (TD) Bank and Canadian Imperial Bank of Commerce are poised to join the world’s soundest banks in raising dividends as profit growth allows them to meet higher capital requirements next year.
Toronto-Dominion and CIBC will boost their payouts while reporting third-quarter results tomorrow, according to Bloomberg Dividend Forecasts, following surprise dividend increases from Toronto-based Bank of Nova Scotia and Bank of Montreal yesterday. Dividend yields at Canadian banks, four of which were ranked among the world’s six strongest banks by Bloomberg Markets magazine in June, are double their U.S. counterparts.
Canadian Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have called for increased corporate spending to help the economy, with Carney this month saying companies are hoarding “dead money.” Lenders such as Scotiabank are reporting record quarterly profit, giving them the opportunity to boost payouts while meeting increased capital requirements next year set by the Basel Committee on Banking Supervision.
“The balance sheets of banks in Canada are relatively healthy and they are very profitable entities, and that’s what dividend increases show you,” Todd Johnson, who helps manage C$385 million ($389 million) including bank shares at BCV Asset Management in Winnipeg, Manitoba, said by phone yesterday. “It’s going to be a lot slower growing business going forward, but it doesn’t mean it’s not a healthy industry.”
Julie Dickson, head of Canada’s Office of the Superintendent of Financial Institutions, has said Canadian lenders should meet the Basel III capital requirements next year, well ahead of a 2019 deadline.
The Basel III guidelines, which will be phased-in between January 2013 and 2019, ask regulators globally to boost capital requirements for banks, limit what instruments count toward capital and force banks to rely more on equity than debt for funding.
Bank of Montreal (BMO)’s dividend increase was the first since the financial crisis began in 2007. The change reflects “our confidence in our continued ability to generate sustained earnings growth,” Bank of Montreal Chief Executive Officer Bill Downe said in a conference call with analysts yesterday.
Toronto-Dominion, the country’s second-largest bank, may increase its quarterly dividend 4.1 percent to 75 cents a share, according to the Bloomberg forecast, which was accurate about 86 percent of the time over the last year. CIBC, the fifth-largest lender, will boost its payout 3.3 percent to 93 cents a share, according to the forecast.
Canadian bank dividend yields outstrip their U.S. counterparts. The eight-member S&P/TSX Banks Index (STBANKX) has an average yield of about 4.1 percent, more than double the 1.96 percent average yield for the 24-member KBW Bank Index. (BKX) And the top six dividend yields among 17 North American lenders are Canadian, according to data compiled by Bloomberg.
Canadian banks’ shares have lagged behind other countries stocks, with the S&P/TSX banks index having risen 4.4 percent in the year through yesterday compared with a 20 percent rise in the U.S. index.
Bloomberg Markets magazine in June ranked CIBC, Toronto- Dominion, National Bank and Royal Bank as the world’s third, fourth, fifth and sixth strongest banks, respectively. Scotiabank ranked 18th and Bank of Montreal was 22nd.
Yesterday, Bank of Montreal said profit for the quarter ended July 31 rose 37 percent to C$970 million, while Scotiabank had record profit of C$2.05 billion, a 57 percent surge.
“Key metrics from the banks’ performance should provide solid indicators for lending, credit, margins and non-interest revenue trends for the third quarter,” Barclays Plc analyst John Aiken said today in a note. “Overall, earnings performances from both banks suggest relatively modest third- quarter results for the ‘Big 6’.”
The country’s six biggest lenders were expected to post a profit increase of 6 percent, according to analysts including Mario Mendonca at Canaccord Genuity in Toronto.
Bank analysts have said profit may slow next year in line with residential mortgage growth.
“My view is it’s a pretty balanced marketplace,” Frank Techar, head of Canadian consumer banking at Bank of Montreal, said yesterday on a conference call with investors. “We might see a little slowing.”
The rest of the banks will report earnings “as expected, which is not dynamic,” said David Baskin, president of Baskin Financial in Toronto, which oversees about C$450 million in assets including bank stocks. “We’re not seeing any huge problems on the downside, just not fabulous growth on the upside.”