Why U.S. banks may soon be returning more cash to shareholders than Canadian banks

All of the nation's 31 largest banks are adequately fortified to withstand a severe U.S. and global recession and keep lending, the Federal Reserve said this month.

It may surprise Canadian investors, but U.S. banks seem like they could return more capital to shareholders than their northern peers over the next year, says Canaccord Genuity analyst Gabriel Dechaine.

The completing the U.S. Federal Reserve’s stress tests a week ago prompted U.S. banks to update their capital plans plus they include significantly higher share repurchase programs (averaging 45% more than 2014) and dividend hikes (60% higher).

Mr. Dechaine noted that dividends and buybacks now represent 71% of forward earnings for the largest U.S. banks versus 55% for their Canadian counterparts.

Canadian banks still lead the way in which in terms of dividends, with an average payout ratio of 46% versus 22% for U.S. banks, but the analyst pointed out that U.S. banks could deploy 48% of forward earnings on buybacks, when compared with just 9% for that Canadian banks.

“While dividends are likely more valuable to investors, at the very least, we believe that U.S. banks levelling the playing field versus Canadian banks when it comes to how much capital they are returning to shareholders is noteworthy,” he said in a report.

“As the premise that Canadian banks offer similar attributes to traditional defensive sectors is affordable, current bank capital deployment strategies are arguably a hindrance to valuation multiple expansion.”

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