Banks expected to deliver dividend hikes

CANADIAN banks are under pressure from the fragile global economy and concern over overleveraged consumers.

That's been the story for the past year and now as the third-quarter earnings season rolls around, the picture is unchanged, except this time several players are expected to spice things up with dividend hikes -- which will no doubt be well-received by long-suffering investors who have watched bank shares basically tread water for the past eight months.

Depending on which analyst you talk to, as many as three or four banks could up their payouts.

Such a move would make a lot of sense in the current environment, with lenders continuing to generate respectable profits despite the headwinds and with most of the sector ahead of schedule in meeting new Basel capital requirements.

Hiking the dividend would also provide markets with evidence the banks' mostly positive outlook on the economy is justified.

"If I was a bank, that's the message I would want to send," said one analyst who asked not to be named.

Sumit Malhotra, an analyst at Macquarie Capital Markets, is calling for higher dividends at Canadian Imperial Bank of Commerce and Toronto-Dominion Bank, while National Bank of Canada analyst Peter Routledge is looking for boosts from TD, Bank of Nova Scotia as well as CIBC.

The third-quarter reporting season kicks off next week, with Bank of Montreal and Scotia both set to release results for the period ending July 31 on Tuesday.

Following repeated warnings from policy-makers about ballooning personal debt levels, consumers are starting to crank back on borrowing -- the trend has been underway for some -- and it's now starting to have a serious impact on bank loan volumes and profits.

Since the end of 2010, consumer loan growth has slowed from just over 10 per cent year-over-year to around six per cent, according to the Bank of Canada. With a lowered capacity to borrow, households have started to reduce more expensive debt.

Many investors are clearly pessimistic about the trend -- analysts say that sentiment is a key driver of bank-share performance -- yet despite that, consumer lending remains one of the biggest earnings drivers for the sector.

Capital-markets operations have been less fortunate, especially since the financial crisis with revenue from trading activities declining in fits and starts while investment banking fees have also fallen.

Rob Sedran, an analyst at CIBC World Markets, expects third-quarter trading revenue to fall for most banks after comparatively strong results in the second quarter.

Sedran is calling for an average decline of more than 10 per cent, with only Toronto-Dominion Bank bucking the trend. On a year-over-year basis, the outlook is more positive, since the third quarter of 2011 was "particularly challenging," he said.

Malhotra is also warning about falling capital markets profits but he argues that decline will be offset by higher loan growth at the banks' flagship domestic personal and commercial banking operations.

"In our view, strength in P&C banking versus weakness in capital markets is a trade that investors will take every time," he said in a note to clients.

In the face of a slowdown in consumer credit, National Bank's Routledge favours banks with significant operations outside of Canada, such as Bank of Montreal, TD and Scotiabank, that can help offset a potential slowdown.

Scotiabank's international banking operation, spread across more than 40 countries in Latin America and Asia, currently provides 26 per cent of the bank's total net income. In the next few years, Routledge expects Scotiabank to earn more from its international banking division than its domestic business.

Analysts polled by Bloomberg expect Toronto Dominion Bank at $1.84 per share, BMO at $1.38 a share, Scotiabank at $1.19 a share, CIBC at $1.96 a share, National Bank at $1.90 a share and Royal Bank at $1.18 a share. All prices are listed at their adjusted estimates.

-- The Financial Post

Republished from the Winnipeg Free Press print edition August 23, 2012 B8