By Tom Bradley

My last Globe column (Of Cash and Quality Stocks) prompted a reader to ask, “Do you believe Canadian Banks will be able to grow their dividends at a healthy clip going forward? Is the growth of the Canadian Banks over?”

In the past, I've underestimated the banks' ability to grow, so I'm reluctant to say it will be any different going forward. And indeed, I suggested in my answer that they will continue to grow their profits and dividends. But I also pointed out that there are some trends that fueled the banks’ past growth that won't be as favourable in the medium term.

  • The banks are big and are running out of room to grow. They already dominate most of the businesses they're in ... in Canada. So growth in these areas will come more from population/economic growth and market share gains (versus each other) than a favourable secular trend. That makes it tougher. As for growth outside of Canada, I love what TD is doing on the U.S. east coast and what BNS is doing in the Caribbean, but in general the competition will be tougher and profit margins lower.
  • There also doesn't appear to be any new business areas that will be meaningful sources of growth. In the past, the banks have moved effortlessly into credit cards, brokerage (full-service and discount), investment banking, wealth management and almost every other area of our lives. It’s not obvious what the next vehicle will be. Perhaps insurance, but it doesn't appear to be developing as favourably.
  • The customers are considerably more leveraged than they were 10 or 20 years ago. Clearly the banks have benefited from this secular trend (and are largely responsible for it), but again, it’s a trend that at best will be neutral going forward, and indeed could be a headwind if Canadians start to deleverage.
  • Canada is one of the few Western countries that hasn't experienced a housing collapse. We aren't heading the way of the U.S. (I hope), but if our market cools off, or indeed drops 10% or more, the banks will feel it. Much of Canada’s economic activity is linked to real estate and another cyclical industry, namely resources.
  • The regulatory environment will be more restrictive going forward. The banks will be required to set aside more capital than they did in the past and will have less freedom in some business areas. This will likely lead to lower ROE's (return on equity).

As I said at the beginning, I never want to sell the banks short. They are well managed and importantly, well regulated. They have a diversified mix of business and know how to use scale to their advantage (ask me about it!). And they are an oligopoly, so the competitive environment is friendly. In other words, they’re in a great position to grow their dividends, but perhaps at a slower pace than they have over the last few decades.