Q: My question is about Banks. Now that the Bank of Canada has paused interest rate but do you think that it will not change the profitability of banks for at least on or two quarters (Net Interest Margins)? Now banks are paying 4.5% plus on GICs so their borrowing cost is not cheap. Your view on banks earnings what will be in this quarter (Net Interest Margin)?
5i Research Answer:
There are some offsets here; one, banks do have variable rate loans which adjust with rates, so there is a bit of a hedge on the way up. Until rates actually decline, net interest margins will be fine. Banks can also quite quickly adjust the interest they pay on daily accounts, HISAs and GICs. Third, assuming lower rates means less pressure on borrowers, it is likely that provisions for loan losses will decline in the banking sector. Banks are very good at 'managing' earnings through provision adjustments. In other words, banks were very profitable when rates were 0% and where rates are now. The biggest areas of concern for banks are typically economic and loan losses, not rate moves.