The Financial Post reports in its Friday, Nov. 19, edition that surging inflation and rising bond yields are set to offer a shot in the arm for Canadian banks' profit margins, which have languished during the pandemic. A Bloomberg dispatch to the Post reports that
Canadian banks' loan growth outside of mortgages all but disappeared during the pandemic. Although spending has increased, that has so far failed to translate into robust credit growth.
Higher interest rates drive banks' net interest margins. However, uncertainty on how persistent inflation will be and how quickly rates will rise is clouding the outlook for lending recovery. Moody's Investors Service's Rob Colangelo says: "If (the Bank of Canada and U.S. Federal Reserve) raise rates too quickly, that would stifle economic growth, and loan demand will decline. That would be a negative for the banks and have a negative impact on profitability."
An aggressive response would raise loan servicing costs, raising the potential for defaults. Banks would increase bad loan provisions, which would lead to weaker profit growth. DBRS Morningstar's Mike Driscoll says a rapid rise in rates would make borrowers more vulnerable, potentially leading to loan losses.
© 2022 Canjex Publishing Ltd. All rights reserved.