OTTAWA (CU)_Since the beginning of the pandemic in early-2020, the Office of the Superintendent of Financial Institutions (OSFI) has prohibited Canadian banks from increasing dividends, buying back shares and increase executive compensation, with the aim of ensuring the financial system could withstand the economic downturn brought about by the pandemic. However, recent reports have shown that the country’s banking sector had managed to withstand protracted financial droughts and remained resilient through lengthy periods of loan losses, over the past year and a half. Speaking of the industry in August this year, the vice-president of Canadian equities at Beutel Goodman Investment Counsel, James Black, said: “The strength of the business is such that they have been able to both survive and ultimately thrive through those downturns.”
Accordingly, last week, the OSFI decided to lift its restrictions on the aforementioned shareholder-friendly moves, a decision which was celebrated by income-thirsty investors who have been eagerly awaiting a hike in dividends. With Canada’s financial institutions having weathered the pandemic in good shape, the chief of the agency Peter Routledge said on Thursday (4 November) that the measures “are no longer necessary”, adding that the decision on capital distribution should be made by the management of the firms.
Calling on the boards and managers to ensure these decisions are made responsibly, the Superintendent said: “Institutions should continue to assess their resilience to vulnerabilities, including any remaining uncertainty related to COVID-19.” He advised them to use “conservative and prudent assumptions” to back up their analysis, and urged them to be mindful of the fact that not everyone has managed to emerge from the pandemic with strong earnings and health capital levels, which was the case for Canada’s banking sector.
Over the recent months, bank investors have been eagerly awaiting a hike in returns as financial institutions continued to pile up cash as a result of the restrictions, as well as the record amounts of funds set aside to protect against a wave of potential loan losses during the pandemic, which failed to materialise. Although the OSFI announced in June that it will raise the domestic stability buffer from 1 per cent to 2.5 per cent, the regulator waited longer to remove other restrictions than some analysts had expected. Yet, Routledge is of the view that the timing was accurate, given the uncertainties associated with the pandemic.
“I’d rather be criticized for being a little too careful than a little too reckless,” he said. “I’ll wear that criticism as a badge of pride.”
