Canadian banks start to loosen purse strings

With Canadian banks now free to deploy excess capital, Bank of Montreal (BMO-T60.230.280.47%) was the first off the mark with a plan to buy back shares this week. However, BMO’s gambit is expected to be the first of several such decisions to flow from the sector in the months ahead.

Late Wednesday, BMO said it will buy back 15 million common shares, which represents about 2.7 per cent of its float.

Buybacks and dividend increases have been on hold at Canadian banks for about two years, under the advice of the Office of the Superintendent of Financial Institutions. Last month, the regulator lifted an unofficial freeze on the spending of excess capital, which was in place until new global requirements for the banking sector were drawn up.

With those new rules set to be finalized next month, requiring financial institutions to hold more capital on their books to backstop lending operations, the banks are now free to deploy that excess capital.

Investors are watching closely to see which Canadian banks will increase dividends after two years of no payout increases. An otherwise minor move this week by Toronto-Dominion Bank’s U.S. subsidiary, TD Ameritrade, to increase its dividend by a few percentage points, is being seen by analysts as a possible sign that TD could be poised to do the same in Canada.

TD owns a 46-per-cent stake in TD Ameritrade.

BMO’s buyback plan comes as OSFI is telling Canadian banks to exercise caution as they prepare to deploy their excess capital.

In a speech in Montreal this week, OSFI superintendent Julie Dickson said banks must take into account the uncertain economic recovery and the new global rules. As well, she said the expanded capital cushion won’t shield banks from all risk. Ms. Dickson suggested they should continue to manage themselves carefully.

“We cannot be lulled into a false sense of security because of some of the significant changes we are making to capital,” Ms. Dickson said. “As they develop their capital plans, banks should consider business scenarios that may adversely affect them.”

Ms. Dickson also said she is not in favour of Canadian banks being declared “too big to fail” under new global rules.

Countries have been debating whether banks that are considered fundamental to maintaining stable economies should be required to hold extra capital on top of the new, more-stringent requirements, and whether they should also be propped up in times of crisis. This is known as the “too big to fail” debate.

Canadian banks, including TD, Bank of Nova Scotia and Royal Bank of Canada oppose their inclusion on such a list. RBC chief executive officer Gordon Nixon said earlier this week that either all Canadian banks should be pegged with that label or none, and RBC should not be singled out just because it is Canada’s biggest.

Ms. Dickson said the “too big to fail” label, and the idea of bailing out banks, creates a moral hazard that encourages risk-taking, rather than responsible management.

“My position has been that it is not wise to publicly declare certain institutions as systemically important,” she said.

Globe & Mail

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