Canadian banks face growing pressure on margins: Moody’s

The big Canadian banks are typically resilient to periods of low interest rates. Nevertheless, the prevailing ultra-low rate environment will pressure banks’ net interest margins (NIMs), says Moody’s Investors Service.

In a new report, the rating agency said that the banks will face intensifying pressure on their NIMs amid continued economic weakness and tougher competition for market share in loans.

Canadian banks have historically weathered periods of low rates well, “but rising funding costs will curb that ability,” Moody’s noted.

“The inherent scale and efficiency advantages of Canada’s largest banks help protect their margins from severe declines,” said David Beattie, senior vice-president at Moody’s, in a release.

“However, margin compression will continue as competition intensifies for loan market share and as banks refinance longer term senior unsecured debt with mandatory lower rated, more expensive bail-inable debt,” Beattie added.

Moody’s said that the banks’ NIMs are unlikely to rebound unless interest rates rise.

In the meantime, tighter NIMs will be partly offset by strong fee revenues, cost controls and the ongoing shift to digital banking, the report said.

“The banks enjoy sizable capital markets and wealth management franchises, which generate strong fee revenue offsetting reliance on net interest income and protecting the banks against margin pressure,” Moody’s said.

“Wealth management and capital markets remained strong contributors in 2020, benefitting from market volatility, equity markets appreciation and high deal volumes.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.