Two major acquisitions in the past few days by Canada’s big banks have yield-hungry investors wondering what this might mean for dividends. At least one analyst is predicting that Bank of Montreal will be the last to hike given its recent purchase.
On Friday, BMO announced an all-stock purchase of Wisconsin-based lender Marshall & Ilsley Corp. for $4.1-billion U.S. in stock. The stock fell nearly 9% in the subsequent two days.
BMO’s capital levels are anticipated to remain relatively strong following the transaction, with an expected Tier 1 capital ratio of 11.7% under Basel II and 8.9% under Basel III, according to Barclays Capital analyst John Aiken. However, he warned that the lingering credit risks may not only weigh on earnings but potentially erode capital.
While the strength of BMO’s fourth quarter moved up the potential timing of a dividend increase, Mr. Aiken said the pending acquisition and its timing means that the earliest increase is likely pushed back. "Therefore, the acquisition and the capital implications surrounding it further strengthen our belief that BMO will be among the last of the Canadian banks to announce a dividend increase coming out of the downturn," he said in a report.
The reaction from analysts was far more positive for Toronto-Dominion Bank’s $6.3-billion U.S. cash purchase of automotive lender Chrysler Financial Corp. on Tuesday. Investors also appeared to like the deal, driving TD shares up more than 3% and the banking sector along with it.
The deal is expected to have a neutral impact on TD’s near-term earnings, but is forecast to contribute $100 million U.S. in 2012 and $200 million U.S. in three to four years.
RBC Capital Markets analyst Andre-Philippe Hardy raised his 2012 earnings per share estimate for TD, but at the same time acknowledged that forecasting future earnings accretion is difficult given the large potential growth Chrysler Financial should contribute to TD’s loan book once lending picks up. At the peak, Chrysler Financial originated $30 billion U.S. of auto loans in one year.
In the wake of the financial crisis, the Office of the Superintendent of Financial Institutions (OSFI) put capital management restrictions on Canada’s banks. But in September, after the Basel Group of banking supervisors struck a deal on capital rules, the Canadian regulator told banks they could again pursue dividend increases, share buybacks and major acquisitions.
Three banks increased their dividends in the fourth quarter -- National Bank, Canadian Western Bank and Laurentian Bank -- and many expect the Big 5 will follow suit early in 2011.
Mr. Hardy thinks all the banks will have increased their dividends by early 2012. He recently said TD could increase its dividend early in 2011. Bank of Nova Scotia and CIBC are expected to follow late in 2011, along with another round of increases from National Bank, Laurentian Bank and Canadian Western Bank. However, Mr. Hardy doesn’t see Bank of Montreal hiking its dividend until 2012.
National Bank Financial analyst Peter Routledge believes his employer can undertake recurring dividend increases and on Monday moved up his expected hike date for Bank of Nova Scotia to the second quarter of 2011 from the first quarter previously.
For CIBC and Royal Bank, Mr. Routledge pushed back his outlook from the second to the third quarter of 2011. The analyst made this change based on his revised earnings trajectory at each bank. It is also a reflection of comments from management during their fourth quarter 2010 earnings calls that suggested they prefer to be comfortably within their target payout ranges before increasing the dividend.
With respect to BMO, Mr. Routledge now expects the Marshall & Ilsley transaction, given the near-term earnings impact, will cause the bank to defer dividend increases until fiscal 2012.
