Big bank CEOs talk lower rates, living in ‘unprecedented times’

The top executives of Canada’s biggest banks are signalling slower growth ahead amid looming trade tensions and America’s falling interest rates, but the lenders remain confident they’ll be able to adapt to the changing environment.

CIBC chief executive Victor Dodig told an industry conference Wednesday that the prospect of more countries moving to negative interest rates is an issue and questions loom over whether trade wars can worsen.

He added that “you can’t keep your blinders on” but CIBC will manage by adjusting its business and investment spending accordingly.

“That’s going to be the plan going forward,” Dodig told the Scotiabank Financials Summit. “We are living in very unprecedented times. Political leadership tends to be on the angrier side, the more aggressive side. Negative rates, trade wars. These aren’t good trends.”

The executives’ comments came days after Canada’s biggest banks reported their financial third-quarter results, with a mix of beats and misses, as tensions between the U.S. and China weighed on business sentiment.

As well, concerns of a potential recession and a recent interest rate cut by the U.S. Federal Reserve cast a shadow over the lenders’ earnings prospects. On Wednesday, the Bank of Canada stayed put on interest rates as other central banks have been signalling or taking policy action in response to expanding trade risks. Analysts have predicted that Canada’s central bank will lower rates at its next announcement in October.

The Canadian banks’ U.S. businesses have benefited in recent years from economic stimulus and rising interest rates, which helped fuel robust earnings growth and spurred several lenders to expand their footprints south of the border.

And as rising interest rates had padded banks’ net interest margins — the difference between the money banks earn on the loans they make and the interest they pay out to savers — the recent rate cut puts pressure on them.

Dodig said Wednesday a 25-basis-point rate cut translates to between $10 million and $20 million of revenues, which is “a manageable amount.”

BMO Financial Group chief executive Darryl White on Wednesday said with declining rates, the growth will be slower. Still, lower rates may stimulate consumer behaviour and unemployment remains quite low, he added.

“If the last two or three (years) were a tailwind, is this a gale-force headwind?… I think it feels like a breeze in the face,” White told the conference. “And that’s really important, because it doesn’t mean that we put the brakes on investment and offence, but it does mean that you start to shift the way you think about benefiting from investments you’ve made over the last three years.”

RBC chief executive Dave McKay agreed there are headwinds but the outlook is “not as dark,” adding that if there is a lower-growth, lower-rate environment the bank will shift gears.

“If there is less growth opportunity, you have less deployment of sales capacity, you have less advertising… we’re still focusing on economic opportunity, but if that doesn’t present itself, we’ll pull back.”

Scotiabank chief financial officer Raj Viswanathan said the lender’s biggest tool to help navigate the changing landscape is its diversification, such as its international footprint.

TD Bank chief executive Bharat Masrani told the summit that while lower rates are not helpful, he would also expect business activity to pick up as a result.

“The part that we should keep in mind is, as quickly as things appear to have turned, it could turn the other way as well,” he said. “And we have to just be mindful of operating the bank as thoughtfully as we can through this turmoil and through this volatility.”