Analysis – Battle for Canadian bank deposits intensifies as interest rate cuts approach – 03/21/2024

Competition among Canadian banks for customer deposits is expected to intensify with the likely arrival of lower interest rates, with customers diverting funds from high-yielding fixed income products to riskier investments. is looking for better returns, according to analysts and executives.

For banks, sticky customer deposits provide a cheaper source of funding that helps control costs and increase margins on loans.

Canada's big banks benefited from the C$350 billion saved during the pandemic, most of which was invested in the popular Guaranteed Investment Certificates (GICs), which earn around 5% interest.

Now that jackpot is likely to find a new home unless banks pay to hold deposits, which would reduce their profit margins, analysts warn. Bank of Canada governors agreed that rate cuts should materialize this year if the economy performs as expected.

“It's very likely that Canadian consumers are more demanding today than they were about 20 years ago, when interest rates were low,” said Mike Rizvanovic, an analyst at KBW.

“Even in a rate-cutting cycle, Canadians may be a little more choosy with their money,” Rizvanovic said, noting that consumers are less likely to keep money in current accounts that pay little interest, even when rates are falling.

Debt financing is one of the most expensive forms of financing for banks. Although term deposits are cheaper, they remain more expensive than demand deposits.

Already, Canadian banks' reliance on medium- and long-term debt and commercial paper is higher than that of their global counterparts. Some 36.8% of funding for major Canadian banks comes from debt, compared to 26.1% for major U.S. banks and 28% for European banks, according to Bank of Canada data.

“What's changing is that banks are more competitive… competition on deposit prices has become fiercer, which leads banks to offer more competitive deposit rates, and that also puts pressure on rising costs,” said Nigel D'Souza, an analyst at Veritas Investment Research.

Big banks took bold cost-cutting steps last year to preserve profits, even as loan loss provisions rose. Analysts now expect profits to decline as banks overcome these challenges and forecast growth later in the year.


Banks are preparing to face the maturity of term deposits.

“One of the dimensions that we all have difficulty predicting is what is going to happen with the C$350 billion of consumer deposits that are currently largely in GICs,” the CEO said last month of the Royal Bank of Canada, Dave McKay.

“Some (deposits) will be re-injected, as we expect, into stocks and investment products. Others will create stimulating demand.

To be sure, the need for banks to collect more deposits depends on loan growth, which is currently weak.

“The question is when loan growth volumes will resume,” said John Aiken, an analyst at Jefferies. “It's a very soft phase where you might want to pre-fund some of that growth if you're very bullish and try to get some deposit market share to fund that growth,” he added.

As of the end of January this year, deposits at the big five banks grew at an average rate of 2.98%, one of their lowest growth rates since the pandemic era.

In Australia, a similar market to Canada, analysts expect competition to squeeze bank profits as pandemic-era subsidized financing comes to an end. In the United States, much of the savings has already been spent.

TD, Canada's second-largest bank, expects some of its deposited funds to be invested in stocks as interest rates moderate, according to Raymund Chun, head of Canadian retail operations. “But we will see and we will adapt accordingly,” he added.

The pressure to capture deposits could lead to product innovations, similar to how telecom companies build customer loyalty.

“As the interest rate environment evolves, we will introduce new products,” said Gillian Riley, CEO of online banking Tangerine, a unit of Bank of Nova Scotia.

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