Bigger, faster rate hikes boost Canadian banks: Moody’s

Accelerating rate hikes from the Bank of Canada should boost profitability for the big banks, says Moody’s Investors Service.

The rating agency said last week’s 50 basis point rate increase, which followed a 25 bps hike in March, benefits the Big Six banks. All six hiked their own prime rates immediately following the central bank’s move.

The hike allows the banks to reprice variable-rate loans, including for home equity lines of credit and residential mortgages, the Moody’s report said, and to renew fixed-term residential mortgages and commercial loans.

“Interest rates on new loans will also rise, including those for residential mortgages, giving a boost to [net interest margins] and profitability,” it said.

Moody’s noted that the Big Six generated aggregate loan growth of 9% year over year in the first quarter of 2022.

“However, slowing global economic activity because of the Russia-Ukraine conflict and spillover effects on consumer confidence may moderate this growth,” it said.

Additionally, the rate hikes will increase borrowing costs for Canadian households and businesses, leading to rising insolvencies and increased loan impairments.

“Given the high likelihood of additional rate hikes, we expect borrowing costs to return to pre-pandemic levels by the end of the year, leading to a moderate deterioration in asset quality,” the report said.

“However, banks’ allowances provide ample coverage to absorb higher credit losses, since allowance for credit losses remains higher than pre-pandemic levels,” it added.

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.