Sunday, October 18, 2009

RBC poised to spend C$1bn on buy-backs

Posted in the FT by Bernard Simon:

Royal Bank of Canada has signalled that it could spend more than C$1bn ($965m) of its bulging capital on share buy-backs, underlining the contrasting financial health of Canada’s banks and many of their US and European counterparts.

Canadian banks have built a sizeable capital cushion over the past 18 months through retained earnings and new equity and preferred-share issues designed to protect themselves from the credit market meltdown and recession-induced loan losses.

Peter Routledge, analyst at Moody’s, the ratings agency, calculates that the six biggest banks – RBC, Toronto-Dominion, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and Quebec-based National Bank – have C$30.7bn in surplus capital, assuming a comfortable minimum ratio of tier one capital-to-assets ratio of 8.5 per cent. The minimum ratio set by regulators is 7 per cent.

With financial markets now stabilising and the economy recovering, speculation is rife on how and when the banks will deploy the excess funds.

Brad Smith, analyst at Blackmont Capital in Toronto, said that “you will see share buy-backs well before you see dividend increases”.

Some of the banks are also widely expected to seek acquisitions beyond Canada’s borders. RBC, Toronto-Dominion and Bank of Montreal already have sizeable retail operations in the US, while Bank of Nova Scotia has extensive interests in Latin America and Asia.

Gordon Nixon, RBC’s chief executive, indicated in a recent interview with the Financial Times that the bank was especially interested in expanding its global capital markets and wealth management businesses.

RBC’s market value is now almost 50 per cent bigger than US-based Citigroup. It boasted a tier one capital ratio of 12.9 per cent at the end of July. The bank reported record net income of C$1.56bn for the three months to July 31, up 24 per cent from a year earlier.

RBC said late on Friday that it intended to buy back up to 20m common shares, equal to 1.4 per cent of the total outstanding. According to the announcement, made after markets closed, the proposed buy-backs would enable the bank “to balance the imperatives of maintaining strong capital ratios with the need to generate shareholder value”.

But Mr Smith cautioned that the bank may buy far fewer shares than the maximum, given the uncertain climate. “To start returning capital at this point in time would be premature,” he said.

RBC last bought back shares during the fiscal year ended October 31, 2008, spending a relatively modest $55m. It raised its dividend most recently two years ago.

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