Banks are keeping some of their powder dry when it comes to dividend increases, analysts say

Concerns government will impose a policy-driven tax levy or recovery funds could be holding banks back

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Canada’s big banks have permission from regulators to turn on the taps with dividend increases, but they may be holding back a bit due to concerns that the government will impose a policy-driven tax levy or recovery funds, as was floated during the federal election last year, according to a new research note from Hamilton ETFs.

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In a note to clients, Hamilton analysts said the big banks could manage a three per cent surtax and the undefined recovery fund floated by the Liberals, though it would “negatively impact” earnings.

More concerning, however, is the possibility the proposals “reflect the beginning of a broader trend towards re-regulation of the financial sector with additional unexpected taxation/regulatory measures to follow,” they said.

This, the analysts suggested, led to a cautious stance at the banks when it came to determining their capacity for capital deployment in the form of dividends and share buybacks.

“We believe this caution by the banks was why the dividend increases were lower than the market expected,” they said, adding that share buybacks in the fourth quarter were “surprisingly small” despite a substantial build-up in capital.