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Discussion Starter #1
I'm disturbed by a few things happening at the Canadian banks. They (and our regulators here) are doing things very differently than both the US and Europe.

During the last few months, the capital requirements of banks have been relaxed. The reasoning is that this helps free up lending, instead of having the banks deleverage and become more conservative. OK, that's understandable.

However, in the US and in Europe, that relaxation of capital requirements has come with other stipulations: namely, that the banks constrain their dividends so that they don't send money flying out the door. Paying dividends weakens the capital position of banks because it's cash lost from the balance sheet. It's a transfer of the bank's cash, to shareholders.

The ECB has told European banks to halt payments of dividends, bonuses, and share buybacks for the rest of this year. That's because all of these activities send much-needed cash out the door. The US Federal Reserve has also forced banks to halt dividend payments for a while.

... but in Canada, the bank CEOs have boldly proclaimed that they will not stop paying dividends (and by extension, won't stop collecting bonuses). And this happens while their capital positions are weaker. Heading into the worst recession we've seen for many decades!

The bank CEOs and their boards, and the regulator, are being reckless. They should be preparing for a worst case scenario which means strengthening their capital positions as much as possible -- stop paying the dividends, NOW. Cut them to zero. Stop the executive bonuses.

Otherwise we could end up with banks teetering on the edge, requiring another massive taxpayer bailout, or possibly even a "bail-in" where possibly even non insured deposit accounts are forced to take losses.

And yes, I know some dividend investors will reply and say they need the dividends. I understand. But do you know what's going to happen if the bank capital erodes so badly that they are forced to raise more equity capital? Your shares will be diluted and could even become worthless, which is much worse than halting dividends.
 

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Have you seen the Federal government? They are way worse than all the banks combined.
 

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Suspending the Canadian bank dividends would be a greater disaster than the capitalization risk you outlined above. If the dividend were to go to zero the share price would plummet. Most Canadian bank shares are owned by pension funds and the solvency ratio of these funds would be hampered for DB plans. For DC plans many would see their retirement plans go out the window. I don't believe the banks will raise dividends any time soon nor should they. Same for buybacks. There are many other companies that should consider cutting or suspending the dividend. Should the banks closely monitor their cap ratios? Absolutely! Are we in danger? Not as long a governments keep throwing money from the sky. When is the party going to end? That's the bigger question. It's been QE for ever as the fix to a downturn. Eventually someone will need to pay the bill.

Cheers
 

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It depends how bad their situation is, which in turn depends on how leveraged they are and how much losses they have to take. I haven't seen an indication that we are having massive bankruptcies or foreclosures as of yet. That could of course change in a few months.
 

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The EU banks are holding an incredible amount of worthless assets on their books. Far in excess what you find in either Canadian or US banks. So they are not the same. They still haven't written off assets from the last financial crisis 12 years ago. The same type of assets that went to zero when US banks collapsed, and the Cdn banks wrote off billions as well from direct exposure, especially in the US. The balance sheets are cleaner.

So far, in the Q1, the banks were able to cover both their dividends and their increased loan losses out of net profits. By the way, those loan losses are weighted towards future expectations as known when reported, and not solely based on actual performance during the first quarter. If they can cover loan losses and dividends from profits in a distressed quarter, I see no reason why they would reduce or cancel dividends. Meanwhile, banks have eliminated share buybacks. And executive compensation? How much do you think those BMO options issued when BMO was above $100 are worth? BNS at $70? CM at $108? And so on. Executive compensation will plummet.

My assessment may change after the next quarter, but we'll cross that bridge when we get there. Economic activity is pretty solid outside of travel and tourism. Some materials sectors are really taking off now, and the dollar has been low which has helped exporters. And consumers are spending plenty domestically because they can't spend it in other countries, which is offsetting lost foreign tourist money. The worst quarter is already behind and we are almost certainly already out of recession and into growth quarter over quarter.
 

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Discussion Starter #6
I agree that Europe could be a whole different ballgame, due to the mess in their banking system (since 2007).

Comparing ourselves to the US is probably a better idea. I'm reading some conflicting information on the dividend policies down south. Does anyone know where this ended up?

From what I can tell (this article), US bank dividends can't be increased for a quarter or two. In Canada, I believe that OSFI has requested the same -- that bank dividends are not increased.

Does anyone know if this is true? That both US and Canada have halted bank dividend increases for the time being?
 

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I think the following links respond better than I could:

 

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After forcing Australian banks to stop dividends in April, the APRA has now allowed them to re-start dividend payments, but limited to a 50% payout ratio. A quick look at current Canadian bank payouts looks to be in the 55% range in the last quarter. I could picture a cap of 50% being sensible and not too onerous. CIBC would be hardest hit.

Ratio%​
Yield%​
TSX:CWBCanadian Western Bank
39​
4.951​
TSX:NANational Bank of Canada
47​
4.528​
TSX:RYRoyal Bank of Canada
55​
4.671​
TSX:TDToronto-Dominion Bank
55​
5.298​
TSX:BMOBank of Montreal
56​
5.733​
TSX:BNSBank of Nova Scotia
58​
6.541​
TSX:LBLaurentian Bank of Canada
58​
5.986​
TSX:CMCanadian Imperial Bank Of Commerce
64​
6.305​
 

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While your comments have merit it does not take into consideration the risk rating of assets (loans) which can vary. For example the risk of a CMHC guaranteed mtge is zero whereas an unsecured LOC or some operating or capital loans carry a higher risk. This is the reason the capital adequacy for Cdn F/I's is based on risk rated assets. CIBC has the highest level of residential mtges of all Cdn Bks and they report that these are soundly based with low loan to value ratios. The following is an undated but believed to be recent article on the subject:
To me, I would rather a F/I be more exposed to the residential mortgage market as opposed to most other areas.
 

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LB cut its dividend by 40%. Then, it has lost about -12% in the last 30 trading days and it's still on-going at an average rate of -0.4% per trading day.
 

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anyone know what the dollar amount of dividends paid Out is for the big 5 annually? Just want to get a sense of the income loss that investors would face. And what the average income loss would be to each shareholder.
 

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Discussion Starter #13
anyone know what the dollar amount of dividends paid Out is for the big 5 annually? Just want to get a sense of the income loss that investors would face. And what the average income loss would be to each shareholder.
Strictly speaking you wouldn't lose anything, because what isn't paid out in dividends stays invested in the company and boosts the equity value.
 

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Strictly speaking you wouldn't lose anything, because what isn't paid out in dividends stays invested in the company and boosts the equity value.
Unless they can't really find a productive investment to make and decide they should raise executive wages and maybe buy a nice jet - rather than giving me the dividend.

ltr
 

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Strictly speaking you wouldn't lose anything, because what isn't paid out in dividends stays invested in the company and boosts the equity value.
Yes, understood. However, the average investor expecting quarterly cash distributions wouldn’t understand this. Try explaining To a customer why a MF earned capital gains and issued a T3 when the unit value when down. ;). Always a favourite conversation of mine.
 

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I think the best thing for banks to do is keep paying dividends.
My bank dividends are like quarterly stimulus checks.

If the government wants to increase bank capital requirements, they're free to do so.
If they don't have a good enough reason to increase the capital requirements, then the banks shouldn't have to.

If they have a good reason, they should increase them.

But if they just want something, but don't have a good reason, the banks shouldn't bother
 

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I'd be curious to learn how many CDN bank shareholders DRIP their dividends. (I drip all of the ones I hold)
If it's as high as I think it is, then the cash doesn't leave the bank - it would, however, switch from one account to another - likely with positive tax implications for both bank and shareholder.
 

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Discussion Starter #19
I'd be curious to learn how many CDN bank shareholders DRIP their dividends. (I drip all of the ones I hold)
If it's as high as I think it is, then the cash doesn't leave the bank - it would, however, switch from one account to another - likely with positive tax implications for both bank and shareholder.
Very good point. If it turns out most people are DRIP'ing, then they have basically turned bank stocks into ones that pay no dividends.
 
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