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Thursday, August 4th, 2016

Banks competing fiercely for borrowers

Adil Virani Vancouver Mortgage BrokerCanada’s banks are locked in a war of attrition this summer, grinding down mortgage rates and competing more fiercely for personal loans in an effort to steal customers from each other.

Stuck in a market where the Canadian consumer is already highly leveraged and more concerned with paying down existing debt, the market for new loans is drying up. As a result, the banks have decided to fight each other on lending rates, hoping it will spur demand.

Looking to bulk up their loan books, many banks are now sacrificing margin to maintain or increase their loan volumes. In a telltale sign, four major banks trimmed mortgage rates recently, just days after announcing disappointing second-quarter earnings that showed shrinking margins across most of the industry.

Though several banks raised mortgage rates on Monday, giving their margins some breathing room, it is the latest example of the kind of tug-of-war over rates that is expected to play out in the months ahead.

But this race to the bottom can’t last, predicts one bank CEO. Réjean Robitaille, chief executive officer of Laurentian Bank of Canada, figures the sector could be headed for a breaking point.

“The market can be undisciplined for a while, but not for a long period of time,” Mr. Robitaille said in an interview. “There is pressure, lots of competition right now. But when you look at history, usually the market is a bit more disciplined.”

The first signs of what Mr. Robitaille is talking about have already started to emerge. On Monday Royal Bank of Canada, Toronto-Dominion Bank and Laurentian moved first to raise rates on residential mortgages, including five-year fixed-rate mortgages. Other banks will likely follow in lock-step. However, while fixed-rate mortgage rates usually fluctuate depending on the cost of borrowing in the bond market, spreads on deposits and other lending continue to be under pressure.

Montreal-based Laurentian, Canada’s seventh-largest bank with $24-billion in assets, dug in its heels this spring and tried to keep margins from eroding by refusing to drop rates lower than what it thought was prudent. The plan worked to some degree, since margins didn’t collapse as much as they could have. But that came at a cost: Laurentian watched as some mortgage customers jumped to other banks.

“On the personal loan side we did quite well. On the mortgage side though, because of the price war in Ontario and other provinces in the country, we decided on purpose not to join the rest of the group … so in that area, we did less volume,” Mr. Robitaille said.

These are the tough choices banks are facing right now as they search for a way to boost loan volumes without cutting profit margins. It’s a balancing act, since banks make the bulk of their money by taking in deposits at a low interest rate, then lending out that money at a higher interest rate.

“What’s happening is no one’s borrowing any more, because everyone’s loaded up with debt,” said Peter Routledge, an analyst with National Bank Financial. “So the banks are competing more – not only for deposits, but also loans.”

The narrowing spread between interest paid out on deposits and interest collected on loans leaves the banks searching for other ways to shore up revenue. Analysts expect cost-cutting will be one approach the banks may favour. Another small measure could be raising fees on consumer products, such as chequing and savings accounts.

“[When] you get the margin pressure we saw, that would probably be a reason to start thinking about it,” Mr. Routledge said of potential fee increases to ease the burden of eroding margins. “[Banks] can get some of it back by raising prices on the cost of the services.”

Toronto-Dominion Bank recently announced monthly fee increases on some of its accounts, boosting, for example, the cost of its mid-level personal accounts by a few dollars, and its premium account by $5. In some cases, TD was bringing its monthly fees in line with rivals such as RBC, which increased rates last summer.

But in other cases, such as its mid-range Infinity account, TD raised fees $1 or $2 above the competition, which analysts believe could set a bar for the other banks to come up to in search of more revenue. Or they could try to undercut those fees if they believe it will attract customers. However, Mr. Routledge notes many consumers are reluctant to subject themselves to the hassle of changing banks over a few dollars.

The banks tend to avoid sticking their necks out too far when it comes to hiking fees. A TD spokeswoman said some of the bank’s accounts hadn’t seen increases in several years. And when Bank of Nova Scotia, Canadian Imperial Bank of Commerce and Bank of Montreal increased some of their account fees over the past year, they did it within months of each other.

Such caution is warranted. Canaccord Genuity analyst Mario Mendonca doesn’t think the banks have much room to move on fees if they want to drum up revenue, since the deposit market is just as competitive as the loan market these days. “They are all dropping rates on mortgages and paying more for deposits,” Mr. Mendonca said. “[It] doesn’t seem to me that the banks are in a position to charge more for anything as the struggle for market share intensifies.”

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