The big Canadian banks benefited from the $350-billion pandemic-era savings, most of which found its way into GICs. Now that pot of cash is likely to seek a new home unless banks pay up to retain deposits
Competition for customer deposits among Canadian banks is expected to intensify with the likely onset of lower interest rates as clients divert funds parked in high-yielding fixed income products to riskier investments in search of better returns, analysts and executives say.
Now that pot of cash is likely to seek a new home unless banks pay up to retain deposits, which will squeeze their profit margins, analysts warn. Bank of Canada governors have agreed that rate cuts should materialize this year if the economy evolves as predicted. Debt financing is one of the most expensive form of funding for banks. While term deposits are cheaper they are still costlier than demand deposits.
The big banks took bold cost-cutting steps last year to preserve profits even as loan loss provisions rose. Analysts now expect earnings to decline as the banks overcome those challenges and forecast growth later in the year.“One of the dimensions that we all struggle to predict is what’s going to happen with the C$350-billion of consumer deposits that largely sit in GICs right now,” Royal Bank of Canada CEO Dave McKay said last month.
“The question becomes … when will the loan growth volumes pick up,” Jefferies analyst John Aiken said. “This is a very squishy stage where you may actually want to pre-fund on some of that growth if you’re very optimistic and try get some market share on deposits to fund that growth,” he said.
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