Wave of dividend increases and share buybacks expected as banks report

Canada’s big banks are expected to roll out significant dividend increases amid quarterly earnings releases this week, but analysts say they’ll also be keeping a close eye on loan growth, cost inflation, and any insights on the pace of the recovery.

The results are the first since early November when Canada’s banking regulator lifted restrictions on raising dividend payouts and share buybacks that were imposed as a cautionary measure at the start of the pandemic.

Thanks in part to government programs supporting the economy, banks have performed well despite Covid-19 and are now sitting on cash reserves far in excess of the minimum requirements.

National Bank analyst Gabriel Dechaine said he is anticipating a “dividend growth tsunami ahead” after seeing how quickly life insurance companies responded to the lifting of the payout restrictions they were also under.

Dechaine said he originally expected dividends would increase over more than one quarter, but that has now changed. “Given what we saw from the Canadian lifecos recently, we believe the timeline is much shorter,” he said in a note.

He expects the dividend increase to average 20%, ranging as high as 34% for National Bank and a low of 10% for Scotiabank.

CIBC analyst Paul Holden said in a note that he expects the average increase to be 17%, ranging between 5% and 25%, but notes the potential upside if the numbers are bigger than expected. He said share buybacks could increase between 1% and 4%.

Costs are another area going up at the banks, and something Holden said could feature prominently in discussions.

“We expect cost inflation to be a major topic of conversation,” he said in a note. “Following guidance provided by the U.S. banks, we expect labour costs to increase over the next year while investments in digital platforms and technology more broadly continue to grow.”

Dechaine noted that the Big Six banks have already reported expense growth of 4% so far this year, and that higher investment spending and wage inflation could create a hit to their outlooks.

But there are also other positives to look out for, including improved loan growth as the economic recovery picks up steam. Canada’s banking regulator said in September that at the time loan growth was up 1.8% in the quarter.

“With the improving macro outlook, credit could come in better than expected, spurring upside earnings surprises,” said Barclays analyst John Aiken in a note.

Scotiabank analyst Meny Grauman said he’s bullish on the sector and expects a wave of payout increases. He said that the banks are trading only modestly above historical multiples despite this being the early stage of an expansionary cycle.

But he also cautioned in a note that Covid variants continue to pose risks, as evident by the Omicron variant that’s raising concern, while runaway inflation and supply chain issues are also areas to watch.

“The key topics of interest this quarter will be the pace of the economic recovery and the potential risk that this momentum can be derailed.”

Scotiabank kicks off the earnings week on Tuesday, followed by RBC and National Bank on Wednesday, CIBC and TD Bank on Thursday, and BMO on Friday.