(Repeats July 17 column without changes)
* Net interest margins (NIMs) seen down through 2012
* Earnings growth under pressure until rates rise
* Banks jostle for loans, deposits to buffer NIM pressure
* TD, RBC, Scotiabank positioned to ride out trend
By Andrea Hopkins
TORONTO, July 17 Frugal Canadian customers, low
interest rates and stiff competition are putting a squeeze on
the profits from loans made by the country's big banks, a trend
that's likely to persist into 2012.
Canada's five major banks all reported a drop in net
interest margins in their domestic operations last quarter and
the slide isn't expected to reverse any time soon. Banks begin
reporting third-quarter results in August.
Net interest margins, or NIMs, are a major component of the
billions in profits Canadian banks earn each quarter, so margin
trends affect the portfolios of millions of investors.
"What we're going to see is there will be continued
pressure this year," Bank of Nova Scotia's (BNS.TO) head of
Canadian banking, Anatol von Hahn, said in an interview.
"My guess is the first or second quarter of our bank year
-- January to April, that period -- I think we will see some
movement on interest rates and that will help us in terms of
getting the NIMs up."
The net interest margin is the difference between what a
bank charge borrowers for loans and pays out to customers on
Typically, banks borrow cheaply at the short end of the
yield curve -- usually through deposits -- and then lend
longer-term loans at a higher rate.
Low interest rates traditionally boost bank profits by
making loans affordable to to a wider number of customers. But
the ultra-low interest rates brought in by the Bank of Canada
after the global financial crisis have skewed the equation.
Bankers say low interest rates are encouraging customers to
stick with less profitable variable-rate mortgages rather than
higher-margin fixed ones. And rates aren't seen rising soon.
A Reuters survey published on Wednesday found forecasters
do not expect the Bank of Canada to raise interest rates until
the fourth quarter. [CA/POLL] The central bank's target
overnight rate is 1 percent, where it has been since last
Starmine data on banks: link.reuters.com/wek62s
Many banks are now trying to make up in volume what they
are losing on the spread.
"Your revenue is your spread times assets, so you try to
get more assets," said Peter Routledge, a bank analyst at
National Bank Financial in Toronto.
But growing loans in Canada isn't easy. There are only five
major banks in the country, all with coast-to-coast branch
networks and deep and stable customer bases. With few people
willing to change banks for their existing needs, lenders are
left jostling for a dwindling number of new loans and
"Consumer lending in Canada is a very competitive
environment already, and when there are fewer loans out there
to be had, the competition is only going to grow to get those
loans," said Craig Fehr, an analyst at Edward Jones in St.
Whether the banks will try to win customers by offering
lower prices via cheaper loans is hotly debated. Canadian banks
avoided much of the global financial crisis because they did
not follow their U.S. counterparts down the sub-prime lending
black hole, and still sound reluctant to go that way.
"Pricing has not been part of our strategy ... that's a
dangerous game," said von Hahn. "You have to be competitive,
but we are not ones that compete on price. We also don't think
that that is sustainable."
That leaves the banks fighting to differentiate themselves
with better service, while accepting that stiff competition
means margins will remain under pressure until rates rise.
"We continue to have a very competitive environment in
Canada and that can certainly affect margins," Bank of Montreal
(BMO.TO) spokesman Ralph Marranca said in an email.
"Going forward we think that margins will continue to have
... stable to downward pressure."
The two largest banks, Royal Bank of Canada (RY.TO) and
Toronto-Dominion Bank (TD.TO), declined to comment on the
outlook for their net interest margins. The two showed the
least compression in the second quarter, leading analysts to
speculate they either made good bets on yields ahead of time,
or simply delayed their pain until the third quarter.
Given domestic margin pressure, some analysts now favor
banks with strong international operations or business lines
outside of retail banking to make up the softness at home.
"We've got a 'buy' on TD and RBC -- they are international
banking players, as is Scotiabank, no question," said Fehr,
noting TD's strong U.S. retail presence and a focus on global
wealth management at RBC. Scotiabank is Canada's most
international bank, with operations across Latin America.
Longer term, many think rising interest rates are the best
hope, as they could quickly drive Canadians into higher-margin
"There will be a herd mentality," said Scotiabank's von
Hahn. "If there is a feeling that this is the beginning of the
rise, I think we will see it quite quickly. Many of those in
variable rates will decide to go into fixed rates and the
margins on the fixed rates are a lot more."
(Reporting by Andrea Hopkins; Editing by Frank McGurty and