The Bank of Canada’s surprise rate bump on Wednesday is a plus for the country’s banks, coming as it does with broad expectations of yet another rate increase before the end of the year.
Recall in July, when the central bank raised its rate for the first time in seven years, each of the Big Six banks promptly raised their prime rates by the full 25 basis points. You can expect that to happen again this time and, quite possibly, whenever Stephen Poloz’s bank next tightens policy.
That’s going to give a boost to net interest margins (NIMs), which have been compressed for years. The margins are crucial in the banks’ ability to generate net interest income, one of their main sources of profit.
Early stock market reaction to the Bank of Canada’s move to one per cent from 0.75 per cent was mixed: the banks initially sold off, then regained that lost ground. But the dramatic recasting of rate expectations may be a positive for bank share prices once the news is fully digested.
Remember, during the first half of 2017, many economists did not expect the central bank to raise rates until 2018. Now, suddenly, we have two rate hikes in the books and another one possible by the end of 2017.
Analysts, when they looked ahead to the most recent set of quarterly bank results, said higher rate expectations were material to their outlooks.
John Aiken at Barclays Capital said, “We believe a continued hawkish monetary stance brightens the outlook for the banks’ net interest margins.”
And, looking back at the fiscal third-quarter earnings that were just reported, Canaccord Genuity analyst Scott Chan said this: “The margin outlook has improved since the Q2/17 results on higher rate expectations.”
On Wednesday, Chan told me the Poloz’s decision to raise rates again will only serve to further that improvement.
“If we get another one in December, we believe margin expectations from banks would be slightly more positive,” he told me by email, noting CIBC stands to benefit the most from higher margins in its mortgage book.