Bay Street awaits ‘dividend tsunami’ from Big Six as earnings loom

Call it a “dividend tsunami.”

That’s the term one analyst is using to describe big dividend increases he believes are on the way with the upcoming results from Canada’s Big Six banks.

As investors know very well by now, the banks have been freed from an edict by Canada’s financial services regulator that they not raise dividends or buy back shares. It was a move by the regulator – the Office of the Superintendent of Financial Institutions (OSFI) – to protect capital levels amid fears of a pandemic-driven economic catastrophe.

The country’s four big life insurance companies have already boosted their dividends by between 11.8 and 29 per cent. The magnitude of those hikes has convinced National Bank of Canada Financial Markets Analyst Gabriel Dechaine that the banks are likely going to announce big increases with their upcoming earnings releases, rather than launch a series of smaller bumps spread over several quarters.

“Following OSFI’s decision to remove capital distribution restrictions on Nov. 4, the banks are set to hike dividends en masse,” he wrote recently in a report to clients titled “A dividend tsunami ahead (and a little buyback wave).”

On average, he predicts, dividends at the six banks will rise 20 per cent. That’s significantly more bullish than the consensus call of 7.1 per cent from analysts polled by Bloomberg News.

Three banks will stand out with dividend hikes greater than 20 per cent, Dechaine predicts: National Bank of Canada, Bank of Montreal and Royal Bank of Canada.

Here are the dividend increases Dechaine expects:

TD Bank and Scotiabank usually announce dividend increases in their fiscal first-quarter results, but Dechaine expects each to break with tradition this time and announce hikes with the upcoming fiscal fourth-quarter results, which will cover the three-month period ending Oct. 31.

He also expects each bank to resume buying back its shares, and pins the buybacks at two per cent of shares outstanding at each Big Six bank.

The larger-than-typical dividend increases will be a direct consequence of the relatively benign loan-loss experience the banks have experienced during the pandemic period.  They set aside the largest loan-loss reserves in their histories in anticipation of a huge volume of loan defaults that never arrived. Since then, they have released much of those reserves back to profit. Thus they built big piles of excess capital that they will begin returning to shareholders with the dividend increases and share buybacks.

Dechaine expects the strong credit trend to continue. “We believe credit performance could yet again exceed expectations leading to [earnings per share] surprises,” he wrote.

Here is when each of the Big Six banks will report fiscal fourth-quarter earnings. In each case, the results are expected before markets open: