Published Fri, 14 Jun 2019 14:49:29 -0400 on Seeking Alpha
According to a new report by Equifax Canada, the national 90-day non-mortgage delinquency rate rose to 1.12% in the first quarter of 2019. Further deterioration of loan book quality of Canadian banks can lead to a rise in risk-weighted assets, and consequently a reduction in capital ratios. This will in turn put pressure on dividend payout as banks will need to retain capital to meet regulatory requirements.
We believe that Toronto-Dominion Bank (TD) and VersaBank (OTC: VRRKF) are relatively safe from adverse movements in asset quality compared to peers because of their already high capital ratios. Consequently we recommend dividend seeking investors to buy Toronto-Dominion Bank and VersaBank.
Dividends Under Threat From Credit Losses
Latest data on credit quality in Canada shows that delinquencies are continuing to worsen. Equifax reported that the national 90-day non-mortgage delinquency rate rose 3.5% to 1.12% in the first quarter of 2019. Our outlook on asset quality for Canadian banks is also somewhat bearish as we feel that trade tensions and an expected fall in crude oil price will further increase credit losses.
Rise in credit losses can increase risk weighted assets and thus decrease capital adequacy ratios (see the Canadian regulator's formulas for capital ratios here). The reduction in capital ratios will in turn put pressure on banks to curtail dividends as they will want to retain capital to meet regulatory requirements. Consequently, a worsening of... Read more
|Stock name||Last trade||P/E||Earnings/Share||Dividend/Share||Dividend yield|
|CANADIAN IMPERIAL BANK OF COMMERCE||81.35||9.5||8.59||4.33||5.17|
|BANK OF NOVA SCOTIA||56.20||11.2||5.02||2.70||4.79|
|BANK OF MONTREAL||72.60||10.2||7.15||3.10||4.33|
|ROYAL BANK OF CANADA||78.79||11.9||6.61||3.16||4.00|
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