Canada's five largest banks all announced dividend increases this week as they continue to show they're among the soundest in the world amid trouble elsewhere. Bank executives credited stronger regulation in Canada.
Royal Bank, Canada's largest, reported its highest quarterly profit ever on Thursday while TD Bank, the second biggest bank, and CIBC, the fifth, also reported better than expected earnings.
Earlier this week, Scotiabank and the Bank of Montreal also reported improved earnings and dividend increases sending a strong signal of financial health in Canada amid bank troubles in Europe.
"The Canadian banks are continuing to generate very high levels of profitability and as a result the capital levels and dividends continue to grow which is quite different from what you have elsewhere," Royal Bank of Canada Chief Executive Gord Nixon said in a telephone interview with The Associated Press. "Good regulation has had a lot to do with it. Banks went into this crisis with much higher capital levels and much lower leverage than the European and the American banks and as a result we were able to weather the storm in a much different fashion than our global competitors."
Crag Alexander, chief economist at TD Bank, notes the banks are increasing their payouts at the same time regulators are telling them to hold more capital because of new international requirements for holding cushions against risk. Canada is one of few countries where the so-called Basel III capital rules for banks have been fully implemented.
"Not only are the Canadian banks on track to meet the demands of the new regulatory system but they also have enough cash to raise their dividends," Alexander said. "What this shows is the robustness of the Canadian financial system."
Scotiabank also showed its strength this week when it announced it agreed to buy ING Bank of Canada from its Dutch parent for $3.1 billion. ING Groep NV, one of Europe's largest financial institutions, has said it needed to raise capital to weather the European debt crisis.
Canada's banks are stable because, in part, they're more regulated. In Canada's concentrated banking system, five major banks dominate the market and regulators know each of the top bank executives personally. As the U.S. and Europe loosened regulations on their financial industries over the last 20 years, Canada refused to do so. The banks were not as leveraged as their U.S. or European peers.
There was no mortgage meltdown or subprime crisis in Canada. Banks generally don't package mortgages and sell them to the private market, so they need to be sure their borrowers can pay back the loans. A large portion of the loans are also government insured with the insurance bought by the customer.
Colleen Johnston, chief financial officer for TD Bank, said there are concerns about an overheated housing market fueled by historic low interest rates, but noted the Canadian government has tightened mortgage rules four times since 2008 in an effort to cool it down. Johnston said TD expects there to be a gradual correction in home prices over the next two years or three years, but said that would be healthy for home buyers and the banks.
Royal Bank's earnings grew to $2.24 billion Canadian (US$2.25 billion), or about CA$1.31 (US$1.32) per share in the third quarter, due mainly to record earnings in the banks Canadian operations. Analysts had expected earnings per share of $1.18 Canadian (US$1.19).
Royal Bank said its quarterly dividend will increase by three cents to 60 cents per share, the bank's third dividend increase in the past five quarters. TD Bank said it will increase its dividend five cents to 77 cents as it reported a record quarter in Canadian personal and commercial banking. TD said the Canadian business grew 12 percent compared to 3 percent growth in their U.S. personal and commercial banking business.