Why Canada’s major projects push has the big banks salivating

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Photo by Brent Lewin/BloombergA decision by Canada’s top banking regulator to reduce the amount of money that the Big Six must keep aside to tackle financial shocks has freed up billions of dollars in capital, but an uncertain economy, weak loan demand and unattractive acquisition targets are making it challenging for banks to deploy that excess cash effectively.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe Office of the Superintendent of Financial Institution lowered the domestic stability buffer (DSB) in June, effectively freeing up a total of $74 billion in capital across Canada’s largest banks, which could be used to support efforts to adapt to the trade war and explore new economic opportunities, the office’s head Peter Routledge said at the time.Those opportunities include Canada’s bid to speed up the building of key energy projects to reduce its reliance on the United States and investments in the defence sector.Breaking business news, incisive views, must-reads and market signals. Weekdays by 9 a.m.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Posthaste will soon be in your inbox.We encountered an issue signing you up. Please try againHowever, as things stand today, there aren’t enough interested borrows, said John Aiken, an analyst at Jefferies Inc., who follows the Big Six.“The banks are more than happy to be making more loans. There are just not enough customers out there demanding it,” he said. “The problem that we have right now is there are some grandiose plans, but there are no shovels in the ground. So, maybe this is a story for late 2027.”The Big Six reported a combined $19.04 billion in profit for the third quarter in earnings results released last week, about 14 per cent higher than the same quarter last year and 1.71 per cent more than the second quarter of 2026. The banks mostly relied on high profits from capital markets.A key point of discussion during the week was how the lowering of the DSB would impact the banks’ common equity tier 1 ratio, which measures how much capital banks have with respect to their risk-weighted assets, such as loans. The lowering of the DSB now allows banks to have CET1 ratio of 11 per cent, as opposed to 11.5Canada’s biggest banks have been well in excess of that figure, with CET1 ratios of more than 13 per cent in recent years. But they are working towards decreasing that.For example, Royal Bank of Canada, which has a CET1 ratio of 13.5, during its quarterly earnings release last week said that they now intend to work towards the middle point of the 12.5 to 13.5 range.One way to reduce the CET1 ratio is to provide more loans. The ratio is essentially calculated by dividing the amount of capital a bank holds by the value of its risk-weighted assets, such as loans. More lending increases the denominator, lowering the ratio, but has been difficult because of the lack of demand.Banks have also used capital to buy back shares. For example, Toronto-Dominion Bank’s chief executive Raymond Chun said on a call last week that the lender could return over $13 billion to shareholders in fiscal 2027 in its bid to reach its CET 1 ratio target of 13 per cent, down from a current 14.3 per cent.But Chun also said that the bank’s primary goal would be to use the capital for organic growth, which would mean relying on mortgages or other types of loan for growth.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.“If we don’t have a need for or have excess capital, we would consistently return capital back to our shareholders, and I see that playing through in 2027,” said Chun.Spending cash on buying back shares, however, doesn’t necessarily “move the needle” on the CET 1 ratio because the cash spent is replaced by the profits that the banks generate, Aiken said.The other way banks can look to deploy capital is by buying other companies. In fact, Aiken’s theory is that Canadian banks may almost be forced into mergers and acquisitions if they aren’t able to grow organically.Bank CEOs are not showing much interest in acquisitions these days. That may be because the share prices in the stock market are quite high driven by aspects such as the boom in artificial intelligence.“First of all, whenever you do like a takeout transaction, you have to pay a premium,” said Shalabh Garg, an analyst at Veritas Investment Research Corp. “That premium would be on top of an already premium valuation. It makes it hard to justify the return on that acquisition.”According to Garg, banks are confident about the government’s narrative of investing in major national projects, and are willing to play the waiting game until they require financing.Overall, the excess of capital seems to be a key reason why the banks have continued to reflect optimism despite an uncertain economy.“I think that’s where the confidence is coming from,” said Garg. “I get it. It’s a big mismatch between what an average person thinks about the bank or economy and how the bank is thinking about the economy.”We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.