March 30, 2010 / 5:04 PM / in 8 years

UPDATE 1-National Bank CEO will press for dividend hike

* May be able to convince within a quarter or two

* Share buybacks less likely to be approved soon

TORONTO, March 30 (Reuters) - The chief executive of National Bank of Canada (NA.TO) said the country’s banking regulator is standing in the way of dividend increases, but may soon agree that higher payouts don’t threaten capital levels at the big lenders.

Asked at a banking conference whether National Bank would consider raising its quarterly dividend, Chief Executive Louis Vachon suggested he was willing to raise the payout if the regulator, the Office of the Superintendent of Financial Institutions, would allow it.

“From your lips to OSFI’s ears,” Vachon told investors and analysts at National Bank’s Canadian Financial Services Conference in Montreal.

“Maybe it is my hope, more than my view, that the rules for dividends I think are going to be looser sooner,” Vachon said, noting that an improvement in provisions for credit losses (PCLs) in the industry bodes well for banks feeling more confident about raising dividends again.

“If we see that the economy in Canada continues to improve and start to see not only stability in PCLs but PCLs starting to come down, (I hope) that we’ll be able to convince the regulator within a quarter or two that doing small increases in dividend ... does not have a huge impact on regulatory capital — and it would be a signal that is positive,” Vachon said.

It has never been entirely clear how much influence OSFI exerts on the big lenders when it comes to decisions that affect regulatory capital. The regulator has consistently said it wants Canadian banks to conserve capital until global banking regulations, which are in flux, are more certain.

Vachon said that while dividend increases may soon be allowed by OSFI, share buybacks were less likely.

“I think it is going to be a long time before they allow that. I think we will need a lot more clarity in terms of Basel III,” Vachon said.

Global efforts to agree on a new set of bank capital and liquidity rules have been dubbed Basel III, and are still ongoing. Implementation is aimed for 2012.

“Same thing in terms of acquisitions. I think they (OSFI) are okay with acquisitions but for another year or two they will continue to be quite stringent in terms of making sure that, at the very least, the goodwill portion of the acquisition and maybe more will be financed through real capital.”

Canada’s big banks have emerged from the financial crisis relatively unscathed, in part because they went into the crunch with stronger balance sheets and higher levels of capital on their books, due in part to conservative regulatory limits.

Laurentian Bank of Canada (LB.TO), a Quebec-based regional bank, surprised investors in December by raising its dividend, becoming the first domestic bank to raise its payout since the financial crisis hit. But it said in March it would wait for more regulatory clarity before raising the dividend again.

Vachon suggested a dividend increase would be small, but regular, as National Bank’s earnings improved.

“If we increase our dividend by 3 cents a quarter, the regulatory capital impact of that is quite minimal, and ... if we’re in the environment where PCLs are dropping for the whole industry, we’re paying that out of continuing earnings, not our capital base,” Vachon said.

“So that’s the argument we’re going to make (to OSFI).”

$1=$1.02 Canadian Reporting by Andrea Hopkins; editing by Rob Wilson

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