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Bank dividends to rise as economy rebounds

U.S. increases could come quickly with Canadian banks following in the fall

The U.S. banking sector has rebounded strongly with the reopening of the American economy.

The trend means U.S. banks will start increasing their dividends, perhaps as soon as the end of June when annual stress tests are completed.

For investors who own Canadian banks, their performance has also been strong, but the resumption of dividend increases may have to wait until later this year.

A recent Globe & Mail article noted that the Office of the Superintendent of Financial Institutions (OSFI) could begin relaxing restrictions at the end of June, following the lead of the U.S. Federal Reserve, but increases may be some way off.

James Learmonth, senior portfolio manager at Harvest Portfolios Group Ltd. in Oakville, Ont. says U.S. banking regulators showed confidence in an improving economy at Christmas, when the Federal Reserve allowed banks to resume share buybacks.

BankTickerDividend% Yield
Bank of MontrealBMO$4.243.34%
Bank of Nova ScotiaBNS3.604.45
CIBCCM5.844.04
National Bank NA2.843.11
Royal Bank of CanadaRY4.323.43
TD BankTD 3.163.62
Source: Globe & Mail

With loan losses provisions continuing to fall in the first quarter of 2021, dividend increases will likely resume soon, he says.

“It’s not a secret the Fed is going to allow dividend increases, but I don’t know if people appreciate the magnitude, “ Mr. Learmonth says.

Mr. Learmonth said the U.S. banking sector has gathered strength since the fall. Year-to-date, the S&P 500 Banks index is up 29.9% and is up 40.1% in the past 12 months.

That compares with the S&P 500 index which is up 12.6% year-to-date and 32.4% in the past year.

“Banks tend to lead from the bottom of the cycle,” Mr. Learmonth says. “We’re still very early on in the recovery, so they will continue to benefit with loan growth and interest margins improving as we move through the balance in the year.”

A second positive theme is the uptick in long term interest rates. A steepening yield curve leads to better profit margins, so while the increases have been modest, margins will respond.

Most banks have been reducing their loan loss provisions which adds cash directly to their bottom line. He noted that in the final quarter of 2020 and first quarter of 2021 the banks aggressively started to reduce them.

For example, JP Morgan Chase & Co., (NYSE: JPM) reported first quarter profit and revenue that exceeded expectations on strong trading results and a US $5.2 billion gain from reducing loan loss provisions.

A year ago, the firm raised its loss reserves, setting aside US $6.8 billion in the quarter. Mr. Learmonth says JP Morgan’s provision for bad loans has fallen $9.1 billion since its peak in the second quarter of 2020.

Canadian banks stocks have handily outperformed the TSX Composite year-to-date with their second quarter far stronger than expected on lower loan losses and improving economic conditions.

Growing cash piles at Canada’s big banks are raising expectations for substantial dividend increases when regulators give banks clearance to resume hikes.

The Globe’s David Berman reported recently (subscriber only) that the increases could be substantial, with CEOs dropping hints during earnings conference calls of large increases. The indication from Royal Bank of Canada, he said, suggests the boost could be as much as 30 per cent. At National Bank of Canada, the boost could be 17 per cent or more.

Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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