The Bank of Canada’s rate cuts will lead to lower deposit costs, but that won’t benefit the banks’ net interest margins in the short term, says Morningstar DBRS.
In a report published Friday, the rating agency said the rate hiking cycle, which boosted banks’ funding costs, resulted in tighter margins for the major deposit-takers — namely the Big Six and Desjardins Group.
Specifically, the average net interest margin declined by four basis points in fiscal 2023, to 1.79%, as higher deposit costs more than offset higher asset yields, the rating agency reported.
Yet, the recent turn in the central bank’s direction doesn’t signal a quick return to healthier margins, the report said.
While declining rates “should help take the pressure off funding costs,” DBRS said it doesn’t expect that “[the] first wave of interest rate cuts will immediately have a significant downward effect on deposit costs, given that most fixed-term depositors will remain locked in at higher interest rates for some time.”
Additionally, while lower rates should drive more lending, DBRS said, “Loans generally reprice quicker than deposits, which could put some downward pressure on [margin] expansion in the short term.”
DBRS is forecasting that margins will stabilize into fiscal 2025 and gradually expand in the medium term. The rating agency expects that loans “will likely reprice at still-higher interest rates,” pointing to residential mortgages in particular, “many of which were originated at low interest rates.”