Wed. Jan 26th, 2022

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TORONTO – Canada’s top six banks are expected to resume raising dividends and share buybacks after a nearly two-year hiatus and report strong quarterly earnings this week, which could boost the sector’s appeal to return-hungry investors, even though equities are trading close to all-time highs.

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The market will also look for clues about the banks’ expected cost growth into next year, as wage pressures increase, and long-awaited improvements in net interest margins as interest rates rise.

The “six major” 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 – have an average dividend of 3.3 %, according to Reuters calculations.

It is to be compared with the global sector median of 2.5% according to Refinitiv data.

The dividend increases, which would be the first since the country’s financial regulator introduced a moratorium in March 2020, which were lifted earlier this month, can range from 10% for Scotiabank at the lower end to 34% for National Bank, Gabriel Dechaine, analyst at National Bank Financial, wrote in a note on November 22, describing the coming increases as a “dividend growth tsunami.”

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Banks are also expected to announce repurchases of around 2% of their outstanding shares on average.

“It will 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. “It flows through to better ROE (return on equity).”

Even without the higher dividends or repurchases, Canadian bank shares have risen to record highs, driven in part by better-than-expected earnings due to the release of reserves set aside to cover loan losses that have not been realized.

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ACCELERATION OF LOAN GROWTH

The Canadian banks will report their earnings in the fourth quarter, with Scotiabank starting results on Tuesday.

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Analysts expect adjusted earnings for the top six lenders to jump by about 37% over the same period last year, helped by a rise in corporate and credit card lending, strong mortgage growth and continued releases of reserves.

An acceleration in lending growth is expected, as savings built up during the COVID-19 pandemic have lifted the purchasing power of consumers and companies even at higher prices, where the broader economic recovery has fueled the fire, says Philip Petursson, investment strategist at IG Wealth Management.

The one blob on the horizon can come in the form of non-interest expenses. They may be 1% higher than in the third quarter, with much of the expected increase driven by variable compensation and a 4% increase in fiscal year 2022 due to rising labor costs and continued investment in technology, CIBC Capital Markets analysts wrote in a note.

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Earnings from capital markets earnings may also decline, although higher-than-expected trading income may help offset lower investment banking fees, some analysts said.

The profit is expected to be 6.6% lower than in the third quarter, mainly due to releases of reserves, which are difficult to estimate and have driven better than expected results in previous periods, and again may lead to positive surprises, analysts said.

The banks’ improved revenue growth, strong capital positions and expectations that the return on equity will remain in their mid-teens for longer than expected are positive, National Bank Dechaine said.

Wealth and asset management units are also likely to have experienced further growth as consumers continued to implement piles of money they have amassed during the pandemic, Petursson said.

“It’s really hard to see where the warts would be on banks’ earnings,” he added.

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