Rating agency DBRS Morningstar says it’s comfortable with federally regulated financial institutions issuing higher dividends and buying back shares following the lifting of capital distribution restrictions by the Office of the Superintendent of Financial Institutions (OSFI) last week.
In a new report, DBRS said the removal of the restrictions “signals OSFI’s confidence that the systemic risk for banks and insurers from the pandemic has subsided.”
The report noted that the big banks and life insurers have managed relatively strong performance throughout the pandemic, saying that “regulatory capital levels have increased for banks and stayed at healthy levels for insurers.”
Additionally, banks have released loan-loss provisions that were built up in anticipation of surging credit losses, which did not materialize.
Indeed, DBRS said loans that took advantage of deferral programs at the height of the pandemic have since returned to active status, and “generally have performed well.”
Against this backdrop, DBRS said it views increased dividends and buybacks as “manageable.”
“Our expectation is for an accelerated pace of capital distributions in order to compensate for the past several quarters during which OSFI’s directive prevented banks and insurers from taking such actions,” said Carl De Souza, senior vice-president, North American financial institutions group with DBRS, in a release.
“DBRS Morningstar is comfortable, all else being equal and given current levels of capital, liquidity and earnings, with aggressive capital returns as long as banks and life insurance companies stay within their capital targets and remain comfortably above all capital and liquidity regulatory thresholds,” he added.
However, the report noted that there are still key risks, including “high household and corporate debt levels, housing market imbalances, and potentially more negative mortality and morbidity impacts associated with coronavirus.”
Manulife Financial Corp. and Sun Life Financial Inc. both raised their dividends following the announcement.