One of the objectives of the Hamilton Capital Global Bank ETF (HBG; TSX) is to pay regular/quarterly dividend income (supported by limited covered call writing) and, as a result, the fund emphasizes (higher) dividend paying banks. HBG also focuses on banks with higher capital ratios, particularly common equity tier 1 ratio (CET1), which is – by far – the most important to global investors (and regulators). The higher this key capital ratio, all else equal, the more likely it is that banks will be allowed to increase their dividends.
How high is capital for banks in HBG?
Very high, at ~12.3%.
The portfolio-weighted CET1 ratio for banks in the Hamilton Capital Global Bank ETF is ~12.3%, significantly higher than the Canadian banks (a market cap weighted ~10%), U.S. large-cap banks (~11.2%) and U.S. mid-cap banks (~11.4%). The U.K. banks are closer at ~12.4%, and the Australian banks are even higher at ~13.5% (internationally comparable, as per APRA study). To provide context, in absence of capital raises and/or determined balance sheet management/shrinkage, it would take close to two years for the Canadian banks to build their ratios to over 12%.
As we highlighted in our Insight, “Canadian Banks – Are Falling Global Reserve/Capital Rankings Increasing Regulatory Risk?”, with a CET1 ratio of just ~10%, the Canadian banks are significantly below the global average of ~13.7%, and rank 34th of the 35 countries we measured (public banks only, market cap minimum of US$300 mln).
Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.