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    BMO   CA0636711016

BANK OF MONTREAL

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Canadian regulator lifts banks' capital buffer to record, priming for post-pandemic world

06/17/2021 | 02:35pm EDT
FILE PHOTO: A combination photo shows Canadian investment banks RBC CIBC BMO TD and Scotiabank in Toronto

TORONTO (Reuters) - Canada's financial regulator raised the amount of capital the country's biggest lenders must hold to guard against risks to a record 2.5% of risk-weighted assets, from 1% currently, in a surprise move that could pave the way for them to resume dividend increases and share buybacks.

The new measures, which take effect on Oct. 31, is a sign that the economic and market disruptions stemming from the coronavirus pandemic have abated and banks' capital levels have been resilient, the Office of the Superintendent of Financial Institutions (OSFI) said in a statement.

But the regulator acknowledged that key vulnerabilities, including household and corporate debt levels, as well as asset imbalances caused by steep increase in home prices over the past year, remain.

In a sign of concern about the housing market, OSFI and the Canadian government raised the benchmark to determine the minimum qualifying rate for mortgages, starting June 1.

The increase in the Domestic Stability Buffer (DSB) to the highest possible level raises the Common Equity Tier 1 (CET1) capital - the core bank capital measure - to 10.5% of risk-weighted assets; a 4.5% base level, a "capital conservation buffer" of 2.5%, and a 1% surcharge for systemically important banks, plus the DSB.

The change "gives OSFI more leeway to loosen a restriction down the road, namely the freeze on buybacks and dividend increases," National Bank Financial Analyst Gabriel Dechaine said.

OSFI felt it was "useful for the banks to understand what our minimal capital expectations are and to give them time to adjust to that... ahead of any lifting of the temporary capital distribution restrictions," Assistant Superintendent Jamey Hubbs said on a media call.

Even with the higher requirement, Canada's six biggest banks would have excess capital of about C$51 billion, dropping from C$82 billion as of April 30, according to Reuters calculations.

That was driven in part by a moratorium on dividend increases and share buybacks imposed by OSFI in March 2020, although a pandemic-driven surge in loan losses has so far failed to materialize.

The Canadian banks index slipped 0.25% in morning trading in Toronto, while the Toronto stock benchmark fell 0.1%.

The increase is the first since the last one announced in December 2019, which did not come into effect as planned in April 2020, as OSFI made an out-of-schedule change https://www.reuters.com/article/canada-mortgages-regulation-idUSL1N2B636J that dropped the rate to 1% in March. It has maintained that level at its twice yearly reviews.

Prior to that, OSFI had raised the required level by 25 basis points at every twice yearly review since it was introduced at 1.5% in June 2018.

($1 = 1.2326 Canadian dollars)

(Reporting By Nichola Saminather; Editing by Marguerita Choy and Jonathan Oatis)

By Nichola Saminather


ę Reuters 2021
Stocks mentioned in the article
ChangeLast1st jan.
BANK OF MONTREAL -2.07% 123.53 Delayed Quote.27.64%
CANADIAN IMPERIAL BANK OF COMMERCE -0.51% 145.07 Delayed Quote.33.43%
NATIONAL BANK OF CANADA 0.53% 95.49 Delayed Quote.33.29%
ROYAL BANK OF CANADA -0.65% 126.18 Delayed Quote.20.64%
THE TORONTO-DOMINION BANK -0.90% 82.95 Delayed Quote.15.34%
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Financials
Sales 2021 25 474 M 20 373 M 20 373 M
Net income 2021 7 136 M 5 707 M 5 707 M
Net Debt 2021 - - -
P/E ratio 2021 11,3x
Yield 2021 3,53%
Capitalization 79 982 M 64 028 M 63 965 M
Capi. / Sales 2021 3,14x
Capi. / Sales 2022 3,06x
Nbr of Employees 43 360
Free-Float 99,9%
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Last Close Price 123,53 CAD
Average target price 134,60 CAD
Spread / Average Target 8,96%
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Darryl White Chief Executive Officer & Director
Tayfun Tuzun Chief Financial Officer
George Alexander Cope Chairman
Steven Tennyson Chief Operations & Technology Officer
Cameron Fowler Chief Operations & Strategy Officer
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