Big Six profit margins to enjoy boost from fixed-rate mortgage increases

Canadian banks’ profit margins will likely benefit from an earlier-than-expected increase in fixed mortgage rates, but some observers are warning that steady growth in rates could blunt demand for loans.

Disturbances in fixed-rate products are noteworthy as they comprise approximately two-thirds of Canadian mortgages.

In the quarter ending January, residential lending at the Big Six increased by 8.3% compared to the quarter prior. This far outstripped the 2.4% growth in commercial lending during the same period, Reuters reported.

“The fact that yields are moving up is a double-edged sword,” said Sadiq Adatia, chief investment officer at Sun Life Global Investments. “It generally means … there’s a light at end the tunnel.”

Adatia, who initially projected these increases to take place closer to mid-2021, added that any “significant movement” in rates stemming from the upward trend of yields will put pressure on mortgage growth while raising funding costs.

Should residential loan demand shrink due to rate growth while other mortgage products remain languid, the Big Six might face “significant earnings risk,” said James Shanahan, equity analyst at Edward Jones.

However, with the largest US banks exhibiting lower loan losses and smaller provisions for credit losses, Canadian banks that deal south of the border might enjoy generous elbow room when it comes to risk.

The Bank of Montreal, in particular, is uniquely positioned to reap such benefits, according to Mike Rizvanovic of Credit Suisse. This is largely because of the bank’s accelerated lending to US-based businesses prior to the pandemic, along with its large commercial lending business in the Midwest.

MBN

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