Canadian Banks Should Also Suspend Dividends - RBC

According to Bloomberg, RBC’s (RY) bank analyst Andre-Philippe Hardy put out a 67 page note Monday morning, suggesting that Canadian banks should “suspend” their dividends:

“Suspending dividends would help ensure that the banks remain privately capitalized,” said Hardy, the Toronto-based analyst for Canada’s biggest bank.

Investors aren’t valuing Canadian banks as if their dividends are sustainable, Hardy said in the 67-page note. The banks have a median dividend yield of 7.2 percent, compared with a 20-year average of 3.8 percent, the analyst said.

Mr. Hardy, welcome to our bandwagon. Launched just Sunday, in fact (see prior post “Bank Dividend Deja Vu” March 8-09). Most investors will hate the idea of a bank dividend cut, but think of it as walking slowly into a coolish swimming pool; it isn’t so bad once you’re completely immersed.

RBC’s Board of Directors is now in an interesting position. If they don’t take the advice of their very own analyst…?

Comments

[daily_reader:]

This analyst should be fired at this time of unstable situation fueling pure idea without taking good consideration of the old and loyal stock holders. He is not smart....just try to be a s.a.

Mar 10 11:54 AM

[Chezfrederick:]

Here are the comments I made on prior articles of the same vein from writers of the lemming mindset:

"Analysts, including Mr. Hardy, have substantially underestimated Canadian Banks earning power... Calls to cut dividends are generally misguided and are a reaction to current market price declines. A long term perspective and a turnaround in the markets towardsthe latter part of 2009 is essential when making such calls. Banks don't want to regret a move to cut dividends now if it would undermine investor confidence and lead to further unwarranted price reductions. Headline grabing commentary are typical of analysts, whose reputation has been tarnished of late.

Should Bank of Montreal have deeper financial issues with their balance sheet then be it... but stop second guessing as you are creating a constant fear that will be self fulfilling even if wrong. The market is spooked as it is and you are adding fuel to the fire.

Canadians have an inherent inferiority complex which leads to inappropriate and costly conclusions and behaviour at times. Some Canadian banks felt that in order to grow, they need to invest in the US rather than chart a policy of growth independant of the big boys... that served them well!!! Investors see the drubbing of the US Banks... and follow the course north of the border... BNS has show us that there are other alternatives, while RY and TD have only tiptoed into the mine fields.

Final point, I copy below a comment I made to another blog on that same issue... Let's not all be lemmings"

"The reason Canadian Banks are a model of banking for the world, is that they have not adopted the herd mentality and followed blindly the path of most other banks. As such, monkey see, monkey do is not a sufficient rationale for cutting dividends.

I believe the market has punished them harshley in an unwarranted fashion, and will come to realize there is value backed by a strong balance sheet justifying a bounce in their stock prices in the near term. As you may recall, their recently announced results were substantially ahead of analyst concensus, and looks solid going forward. Their reserves have been built up, and can provide a good profit bounce when time comes to reverse such unused portions.

Let's celebrate the difference and success, stop the pessimism, encourage solid market participants, rather than pile up the pressure with no justification.

I would be first in line to dump my holding should dividends get cut, as it would signal to me, that their financial problems run deeper than has been previously indicated.

Let's not just blow away their unique position and long lived tradition every time the winds temporarily change direction. Think long term, think respect, think confidence."

Mark my final comment to you is, please get creative and write more in debth analysis on topics of investor interest, rather than regurgitate some failed analyst comments. I am sure that the RY board knows not to make mistakes in following advice of Mr Hardy as they know better than anyone that he has been wrong more than right in the past.

Mar 10 01:11 PM

[gbishop:]

The banks' stock has already been unduly beat down, trading at ridiculously low multiples given that they are still very profitable businesses.

To cut the dividend would push the stock price down further, which doesn't help anyone. The banks are already well capitalized; they don't need an overhaul of their capital structure.

Mar 11 11:12 AM

[Bingo 2:]

McQueen is another talking head whose novel idea is to paint all situations with the same brush. People like him should not be able to comment if they do not understand the underlying differences between the American banks and the Canadian banks. Some folks are not as greedy and stupid as others. Guess whose banking system tossed common sense out the door? Take a hike McQueen and clear your brain.

Mar 11 11:58 AM

[Candor7:]

No chance of a RB divident cut ...YET.

The conditiojns do not require it.

It all depends on what happens in the furyre with the systeic ailments in the WOrld Banking System.

Canadian Banks have recently recapitalied by offering preferred shares to the public, on the basis of dividend returns.

So it is very unlikely that there will be dividetd cuts to those who have come to their aid in time of need, unless the situation evolves to require it.

Perhaps McQueen has a crystal ball, but his record of predictions does not support that conclusion. So our guess is as good as any other.

Maybe Canadian Banks are just too strong for their own good? LOL.

Its often hell to be on top.

But Candadian Banks have earned where they are, no one gave them a hand wringing step up.

Mar 11 02:49 PM

[Retired Banker:]

I did not read the 67 page note- but if it took him that many pages to make his point RBC should fire him!

Mar 12 11:05 AM