Interest rate hike could give RBC $300M boost over 5 years—CEO

BoC’s overnight lending-rate hike to 1% expected to bolster Canadian banks’ net interest margins

Interest rate hike could give RBC $300M boost over 5 years—CEO
Canada’s biggest banks are poised to benefit from a surprise interest rate hike on September 6, with Royal Bank of Canada’s chief executive estimating the revenue bump at upwards of $300 million over five years.

In an industry conference in Toronto after the Bank of Canada announced the 25-basis-point increase, RBC CEO Dave McKay said that the change should benefit the bank’s retail franchise by roughly $100 million in revenue in the first year.

That figure could “increase to upwards of $300 million in year five as it takes a while to blend into the portfolio, as we roll off assets and we refinance assets at the higher rate”

“For us, $300 million for 25 basis points is quite meaningful,” McKay told The Canadian Press.

The Bank of Canada’s overnight lending-rate hike to 1 per cent boosts Canadian banks’ net interest margins, which is the difference between the money they earn on the loans they make and what they pay out to savers. That, in turn, translates into greater revenue for the country’s financial institutions.

RBC, Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, and Bank of Nova Scotia have moved to increase their prime lending rate by 25 basis points from 2.95 per cent to 3.2 per cent, effective September 7.

TD CEO Bharat Masrani told the conference that rising interest rates are a “positive phenomenon” for the financial institution. In the U.S., where the bank has a large deposit base, the four rate hikes handed down by the Fed has been a “tailwind,” he added.

Masrani was reluctant to put a dollar figure on the impact of a rate hike. However, he said it would be generally positive for TD as long as the hikes are done in an orderly fashion and do not tip the economy into a major slowdown.

“If that were to happen on either side of the border, it would not be positive … The stage that we are at and the cycle, I would think that, for a while at least, this would be a positive phenomenon,” Masrani said.

CIBC’s chief executive Victor Dodig said that a 100-basis-point increase, as a reference point, would translate to $157 million in after-tax profit on an annualized basis across the board in the U.S. and Canada.

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