Basel and Canadian Bank Dividends

Includes: BMO, BNS, CM, NTIOF, RY, TD, XLF
by: Market Blog

By David Berman

What does Basel III mean for bank dividends? Here's the one-word summary: Up.

The agreement on new international financial regulations – announced over the weekend – has long been seen as a sticking point for any commitment on the part of Canadian banks to resume their dividend increases, which have been on hold for at least two years.

Bank executives needed to see some certainty on what the new regulations would entail and when they would be implemented. Now, there is some clarity. Okay, Basel III still needs to be approved by the G20 in November, but at least banks – and bank analysts – have something to chew on now.

Michael Goldberg, an analyst at Desjardins Securities, believes that the agreement is positive news for Canadian bank stocks. Basel III requires banks to increase their capital levels to guard against another financial downturn and prevent a crisis like the one we saw in 2008, but the new rules aren’t a problem for already-flush Canadian banks.

And as for dividend hikes...: “The presentation of new rules in November will likely clear the way for Canadian banks to announce dividend increases, probably beginning with [fiscal fourth quarter] earnings announcements in November and December – which is sooner than we had previously expected,” Mr. Goldberg said in a note.

The new rules could also pave the way for share buybacks and acquisition activity, too. Mr. Goldberg believes that Royal Bank of Canada (NYSE:RY), Toronto-Dominion Bank (NYSE:TD) and Bank of Nova Scotia (NYSE:BNS) will be in acquisition mode, while Canadian Imperial Bank of Commerce (NYSE:CM)will be more focused on share buybacks. As for Bank of Montreal (NYSE:BMO) and National Bank of Canada (OTCPK:NTIOF), expect both.

In general, analysts have been trimming their target prices on Canadian bank stocks in recent months. Despite what looks like an upbeat reaction to the Basel III agreement so far, analysts have stuck to their targets.

Disclosure: None