The Canadian flag blows in the wind in the heart of the financial district in Toronto on June 27, 2018. THE CANADIAN PRESS/Tijana Martin

Banking regulator lifts restrictions on dividend raises, share buybacks

Banking regulator lifts restrictions on dividend raises, share buybacks

TORONTO — Banks and insurers are free to increase dividends, resume share buybacks and raise executive compensation as of Thursday after Canada’s financial services regulator lifted the COVID-19-related restrictions.

Peter Routledge, head of the Office of the Superintendent of Financial Institutions, said on a conference call with media that the financial and economic risks of the pandemic have eased so the restrictions imposed in the early days of the outbreak no longer stand.

“As Canada’s economic picture has stabilized, the original rationale for many of the measures put in place last spring in response to the COVID-19 pandemic is no longer valid.”

The regulator imposed the restrictions on dividends and buybacks in March 2020 at the same time as it eased requirements for cash stockpiles at the banks, with the expectation that the extra capital be used to lend to businesses and households to keep the economy going.

Since then, government support programs have also helped stimulate the economy, and the banks are now sitting on cash far in excess of the minimum requirements.

Routledge said it was time to once again let company boards of directors make decisions on appropriate payouts, while cautioning them to be aware of the unevenness of the economic recovery.

“As always, we expect responsibility, humility, and prudence from financial institutions,” said Routledge.

“Be mindful that not everyone performed as well, or had as prosperous an experience through the COVID-19 as some of our largest financial institutions.”

Investors have been waiting to see these restrictions lift for some time, but Routledge said the resurgence of the pandemic in the late spring made it worthwhile to wait to see how the effects would play out.

“I’d rather be criticized for being a little too careful rather than a little too reckless,” he said.

Barclays analyst John Aiken said in a note that with the restrictions lifted he expects to see sizable dividend or buyback increases from all the banks because they’re generally paying out dividends below their target of roughly 45 per cent of current earnings.

“With considerable levels of excess capital, we expect the Canadian large cap banks could go beyond their usual conservative stance, and reward investors with a more aggressive bias for dividend hikes and share buybacks.”

Aiken noted that National Bank and BMO would both need to lift their dividend more than 45 per cent to hit the target, while Scotiabank’s dividend is already in line so it’s more likely the bank would use “aggressive” buybacks to compensate.

Bank executives have said they plan to return payouts to their target range, as have insurance companies.

Earlier on Thursday, Manulife chief executive Roy Gori reiterated the company’s commitment to raising payouts on an earnings call.

“We intend to resume dividend increases when the regulatory restrictions are lifted…we’ve regularly increased dividends over many, many years, and that’s something that we feel is an important capital priority for us.”

This report by The Canadian Press was first published Nov. 4, 2021.

Companies in this story: (TSX:BMO, TSX:NA, TSX:BNS. TSX:MFC)

Ian Bickis, The Canadian Press

Banking