Canadian banks will remain cautious about how they deploy their capital, even as new, achievable global bank capital-reserve requirements appear to clear the way for the Big Six to become more aggressive in how they spend their cash.

“However the banks choose to deploy their capital,” says Brenda Lum, financial analyst with DBRS Ltd. in Toronto, “whether it’s through share repurchases, dividend increases or acquisitions — it will still be in the context of managing capital prudently.”

Financial services analysts and other industry observers suggest that Canadian banks will elect to tread carefully — at least, until November, when the new capital-reserve requirement rules will be presented to the G20 leaders in Seoul for approval.

“What we see on paper today may not exactly be what’s on paper by the time it gets to the G20 meeting,” says Shane Jones, managing director and head of Canadian equities with Scotia Asset Management LP in Toronto.“I don’t think the final rules will be dramatically different from those proposed. But there could be a little bit of horse-trading in between now and then. So, the banks will want to wait for full clarity and ratification.”

In mid-September, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, had announced it had come to an agreement regarding new capital-reserve requirements for global banks. Banks will now be required to hold a minimum of 4.5% of common equity, up from 2.5%, and total Tier 1 capital of 6%, up from 4%. The new rules also require a “capital conservation buffer” of another 2.5% of common equity and a further countercyclical buffer of up to 2.5% of capital, as required. The new requirements, known informally as Basel III, will be phased in over an eight-year period.

Canada’s Big Six, boasting Tier 1 capital ratios of between roughly 12% and 14%, are widely expected to be able to comply easily with the proposed global capital-reserve regulations. The Tier 1 capital ratio represents a bank’s core capital divided by the bank’s risk-weighted assets.

“Canadian banks should not have any problems meeting these new thresholds significantly earlier than [their] major global peer groups,” says John Reucassel, an analyst with Toronto-based Bank of Montreal’s capital markets division, in a report.

Following the announcement of Basel III, Canada’s Office of the Superintendent of Financial Institutions had released an advisory, giving banks more leeway in terms of how they deploy their capital.

With the benefit of more clarity regarding the outlook of global banking regulations, and in light of the new OSFI guidance, some Canadian big banks have indicated they might soon be in a position to consider dividend increases — something they haven’t done since the autumn of 2008, when the global financial crisis hit.

Says Jones: “You may see one, possibly two, banks go in December [when fourth-quarter earnings reports are announced], in terms of a dividend hike.”

Not all of the Big Six may be in a position to increase dividends in the short term, as some of the banks are sitting at the high end, or above, their stated dividend payout ratio.

Analysts suggest Toronto-based Toronto-Dominion Bank and Montreal-based National Bank of Canada are the most likely to be the first to announce an increase in dividends, while BMO and Toronto-based Canadian Imperial Bank of Commerce are seen as likeliest to move last. Whatever the timing of dividend-increase announcements, analysts agree that the banks are likely to announce modest increases in dividends rather than make bolder moves.
@page_break@And although there’s a possibility that one or more of the Big Six banks might announce share buybacks, Jones says, that is less likely to happen in the near term than dividend increases.

“I think the banks will want to make sure they have the real rules set down and clarified [first],” he says, “knowing how much capital they’re going to need over the next 10 years. Why buy back stock if you’re only going to have to reissue it?”

Each of the Big Six banks has communicated to shareholders about their strategies and plans, including possible acquisitions, reinvestments and dividend hikes, during recent earnings calls and conference presentations.

Toronto-based Royal Bank of Canada has made no secret of its interest in acquiring asset-management firms in Europe and elsewhere around the world. RBC’s senior management has indicated the bank continues to be in communication with European financial services firms that might be interested in divesting themselves of units — particularly in the aftermath of Basel III.

Said RBC president and CEO Gord Nixon at the Scotia Capital Financials Summit, held the week of the Basel III announcement: “We spent a lot of time trying to get a better understanding of what opportunities may present themselves in [Europe] that are attractive to our objectives of both asset management and built-in distribution, whether it’s housed in other financial institutions or otherwise.”

Analysts feel it is unlikely RBC will look to make further acquisitions in the U.S. retail banking space, preferring instead to focus on trying to turn around its existing U.S. franchise, which has been a drag on overall earnings for some time.

At the same investor conference, TD president and CEO Ed Clark said that he wasn’t interested in adding to the U.S. retail network in the northeast, where he felt it wasn’t needed, but would be interested in possibly adding to his bank’s footprint in Florida, although the bank wouldn’t “chase deals” that didn’t work. “[We] want to make sure,” he said, “that our acquisitions make us money.”

Much like RBC, Toronto-based Bank of Nova Scotia is also interested in growing its wealth-management business internationally, though its primary focus is Latin America and other emerging markets. On Sept. 17, Scotiabank announced it had acquired Sao Paolo-based wholesale bank Dresdner Bank Brasil SA-Banco Multiplo (DBB) from German bank Commerzbank AG. Terms of the transaction weren’t disclosed.

Said Scotiabank president and CEO Rick Waugh at the investor conference: “The time [to make acquisitions] is now, because now not only are we in good shape but a lot of our [global] competitors are in not so good shape.”

Scotiabank will also continue to concentrate on growing its wealth-management business domestically, where it has made a number of significant acquisitions in recent years.

BMO has said it will be looking to increase its commercial-loan business in the U.S. as well as continuing to seek bolt-on acquisitions for its Chicago-based Harris Bank retail business, but do so in a disciplined way. In particular, BMO will keep an eye out for appropriate deals featuring troubled banks and the support of the U.S. Federal Deposit Insurance Corp.

Said BMO president and CEO Bill Downe at the conference: “Our long-term vision for Harris encompasses a retail business [of] perhaps the same size as the personal and commercial business in Canada in terms of number of branches, and a top three retail position in most of the markets [in which] we compete.”

Although CIBC president and CEO Gerry McCaughey has said he is pleased with the increased clarity brought by Basel III regarding capital-reserve requirements, he said CIBC would continue to proceed cautiously in terms of capital deployment.

“It’s an environment that is changing,” he said at the inves-tor conference. “We are still in the thought-process stage of capital planning.” IE