With global banks facing pressure from regulators in terms of their capital levels, Barclays Capital analyst John Aiken believes there is a very real risk that target payout ratios at Canadian banks will reverse themselves, reverting back to between 35% and 45% of earnings.
He warned that industry earnings would have to increase by almost 25% from the strong levels in the first quarter of 2010 to reach the mid-point of this range.
“Should the banks begin to lower their payout ratios, investors could have to wait several more quarters before they see material dividend increases,” Mr. Aiken said in a note. “Additional growth would be required to generate dividend increases.”
So while the banks are suggesting that higher interest rates will have a positive impact on margins and earnings, if dividends remain static, valuations may come under pressure.
With the industry’s payout ratio now back down below 50%, concerns regarding dividend cuts have subsided. However, increases could ne another issue entirely.