RBC comments Canadian Diversified Financials
Return of the Cap(ital), once again. Return of the Cap, watch my flow: OSFI lifts restrictions on share buybacks and dividend increases
Our View: Within our coverage, we think OSFI’s announcement that it is removing its restrictions
regarding dividend increases, special dividends and share buybacks for federally regulated financial institutions is most positive for HCG given its substantial excess capital, and incrementally positive for EQB, IFC, POW and BBU. We expect returns of capital, particularly dividend increases, to be measured in that we don't expect companies in our coverage to return excess capital all at once.
Summary: OSFI announced, effective immediately, it is removing its restrictions regarding dividend increases, special dividends and share buybacks for federally regulated financial institutions.
Our view regarding the impact for affected companies in our coverage is:
• Home Capital (HCG): the big winner, as valuation does not reflect substantial return of capital
potential in our view. HCG’s Q2/21 CET1 was 22.3% vs. their 13-14% target. This implies ~$13/share of excess capital (30% of HCG’s share price). Assuming a 13.5% CET1 ratio, this could increase ROE by ~500bps (we forecast 11.6% ROE in 2022). In addition, fundamentals and industry backdrop remain positive, yet HCG trades just under 1.2x P/BV. We expect HCG to reduce its CET1 over the next 1-2 years via substantial issuer bid(s); re-instating its dividend, which could attract dividend/incomeoriented investors; share buybacks; and possibly a special dividend. HCG reports Q3/21 results on Friday, November 12 (before market open).