Canada’s banks to cement status as solid investments in a crisis

(C) Reuters. FILE PHOTO: A man walks in front of buildings in the financial district in Toronto

By Noor Zainab Hussain and Nichola Saminather

(Reuters) – Canadian banks, whose dividends yields climbed during the financial crisis, are again gaining favor with investors, as their pledges to maintain payouts gives them an edge over global counterparts who have shunned them.

Canadian banks are currently offering dividend yields of 5.7% versus U.S. banks’ 4.2% and European lenders’ 1.7%, according to Datastream.

(GRAPHIC: Canada bank yields outstrip European, American rivals – https://fingfx.thomsonreuters.com/gfx/mkt/ygdpzqyndvw/Pasted%20image%201590422653409.png)

Dividends are seen as evidence of good financial health and encourage loyalty from investors, particularly in the current low-yield environment.

Canadian lenders have seen the smallest declines in share prices versus peers in Europe and the United States in the past three months.

(GRAPHIC: Canadian bank shares higher than international rivals – https://fingfx.thomsonreuters.com/gfx/mkt/nmopaknynpa/Pasted%20image%201590422235819.png)

“Globally, there continues to be a pursuit for yield … and there are simply not many places where you can get yield anymore,” said Kash Pashootan, Chief Executive Officer of First Avenue Investment Counsel.

“That has forced investors into the dividend-generating equity realm … Canadian banks are a natural beneficiary of that,” he added.

(GRAPHIC: Banks’ dividend yield – https://fingfx.thomsonreuters.com/gfx/editorcharts/rlgvdwbmypo/index.html)

SHARP CONTRAST

In contrast, top UK banks axed 2019 dividend payments after pressure from the regulator and are likely to review their plans for 2020.

Banks across the euro zone are also tearing up plans to return cash to shareholders.

In the United States, authorities have pushed for banks to preserve capital.

Bank of America (NYSE:BAC) Securities analyst Ebrahim Poonawala pointed out that Canadian banks were one of the few developed market lenders to not cut dividends in 2008.

This was in part because of stronger balance sheets and capital levels, helped by conservative regulatory limits.

(GRAPHIC: Canadian banks’ dividend – https://fingfx.thomsonreuters.com/gfx/editorcharts/xegvbkwgrpq/index.htmlon)

Sprung Investment Management President Michael Sprung, however, argues that despite the higher payouts, the negative impact of exchange rates and the hit to the country’s resources industry will keep demand from foreign investors in check.

(GRAPHIC: Canadian banks’ return on equity – https://fingfx.thomsonreuters.com/gfx/editorcharts/jznvnegexpl/)index.html