But the two large banks see profits fall as economic uncertainty offsets gains
Two of Canada’s largest banks are reaping rewards from higher interest rates as profit margins on loans increased in their fiscal third quarter, though growing economic unease threatens to undercut some of those gains in the near future.
Banks expect margins will continue to increase in the coming quarters, albeit at a slower pace. They also acknowledged, however, that with inflation running high, borrowing costs rising and significant economic uncertainty, demand for new loans – especially residential mortgages – could dip. And banks expect loan defaults will start to creep higher, from unusually low levels.
In TD’s core Canadian retail-banking division, margins increased 9 basis points to 2.7 per cent, compared with a year earlier. Margins in CIBC’s Canadian personal and business banking unit increased 13 basis points to 2.52 per cent. Banks are also still expecting a rebound in borrowing on credit cards, which are a high-margin product because they charge high interest rates. Spending levels on cards are back above prepandemic levels, with transaction volumes up 10 per cent year over year at TD and spending levels reaching a new record. But the balance customers carry on those cards is still lower than it was prior to COVID-19. When that borrowing bounces back, it could also help banks’ lending margins.
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