Canadian banks should consider suspending their dividends to ensure they have enough money to cover future writedowns and loan-loss provisions, RBC Capital Markets analyst Andre-Philippe Hardy said. Suspending payouts would “materially” increase capital and reduce the need for banks to raise cash if loan losses and writedowns surpass those of the early 1990s, Hardy said in a note sent to investors today. March 9th 2009 (Bloomberg)
Shocking! Treasonous! And thankfully Mr. Hardy was completely wrong. No Canadian banks cut their dividends and now for the first time in two years, bank dividends are set to march higher. Thanks to conservative lending practices and limited exposure to U.S. subprime mortgages, our banks were able to weather the credit crisis storm. While many U.S. banks required capital injections from the Federal Reserve in 2008, our banks were able to raise money from private investors to bolster their balance sheets. With the recession now over, Canadian banks can now start returning their good fortunes to shareholders.
First out of the gate to raise its dividend was our favourite bank, the National Bank of Canada. On November 30th, National Bank boosted its dividend payout by 6.5% at the same time it reported record high profits for its 2010 year-end. What about those supposed writedowns and loan loss provision? They were near record lows for National Bank.
We started buying National Bank of Canada for our clients in 2004. Sure we heard all the criticisms, it’s too small, it’s too regional and its stock price will always suffer from a Quebec discount. What attracted us to the stock was the discount. National Bank was trading at 30% less than its peers and it offered a higher dividend yield. While its contemporaries actively pursued U.S. expansion, National Bank quietly went about its business improving its trading operations, acquiring Canadian wealth managers, and adding more retail branches in other provinces. When 2008 hit, National Bank, with no U.S. exposure, did not suffer the same earnings hit as the other Canadian banks.
As the best performing bank stock in Canada over the last two years, National Bank has silenced the critics and rewarded our investors.
The author owns shares in National Bank
