Canada’s biggest banks are poised to benefit from a surprise interest rate hike on Wednesday, with Royal Bank of Canada’s (RBC) chief executive pegging the revenue bump at upwards of $300 million over five years.
RBC CEO Dave McKay told an industry conference in Toronto after the Bank of Canada announced the 25 basis point increase 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,” he said.
The Bank of Canada’s overnight lending rate hike to 1.0% 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 more revenue for the country’s financial institutions.
The lending margins of Canada’s biggest banks had been under pressure in recent years until July, when the Bank of Canada lifted its key interest rate from 0.5% to 0.75%. That marked the central bank’s first rate hike in seven years.
After July’s rate hike, Canada’s biggest banks quickly followed suit by increasing their prime lending rates by 25 basis points. Banks use the prime lending rate to set interest rates for variable-rate mortgages and other loans.
On Wednesday, RBC, Toronto-Dominion Bank (TD), Bank of Montreal, Canadian Imperial Bank of Commerce (CIBC) and Bank of Nova Scotia moved to increase their prime lending rate by 25 basis points from 2.95% to 3.2%, effective Thursday.
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 be 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.
Victor Dodig, CIBC’s chief executive, told the summit on Wednesday 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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