Savers are seeking better returns with lower rates
Canadian banks are gearing up for fierce competition to retain customer deposits as interest rates decline and investors seek better returns elsewhere.
Analysts warn this could squeeze bank profit margins and reshape their funding strategies.
The $350 billion in pandemic-era savings provided a boost for banks, with much of it parked in Guaranteed Investment Certificates (GICs) that earn around 5% interest. However, falling rates could prompt clients to move those funds into potentially riskier investments.
"Canadian consumers are more demanding now than they were in the past couple of decades when interest rates were low," KBW analyst Mike Rizvanovic told Reuters. "Even in a rate-cut cycle, Canadians may be a bit more demanding on their money.”
Consumers may be less inclined to leave funds in low-interest accounts, creating pressure on banks to offer competitive rates.
Read next: BoC officials suggest rate cuts could come this year
Debt financing remains one of the most expensive funding sources for banks. While term deposits offer some relief, they are still costlier than demand deposits.
This issue is exacerbated for Canadian banks, which are more dependent on debt financing than their global peers, according to Bank of Canada data. About 36.8% of large Canadian banks funding comes from debt, compared to 26.1% for large US banks and 28% for European banks.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
