Home Business Yes, banks profit from borrowers who are squeezed by higher rates. But there’s more to the story

Yes, banks profit from borrowers who are squeezed by higher rates. But there’s more to the story

by News Desk
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December 7th will be a good day for Canadian banks.

of bank of canada The trend setters had an opportunity to adjust their overnight rates that day, and a rise of 0.25 to 0.5 percentage points is widely expected. You will take up variable rate mortgages, lines of credit, and variable rate loans.

Higher interest rates on these loans mean two things: higher costs for borrowers and more money for banks. “In general, higher interest rates are good for banks,” said Karl de Souza, senior vice president of North American financial institutions at DBRS Morningstar.

But it’s not the whole picture. Rising interest rates tend to accompany economic and financial market recessions that can hurt bank profits. Expect to see some evidence of this when the Big 6 banks next release their financial results.

Bank of Canada’s Carolyn Rogers said some recent homebuyers will find interest rate hikes painful as mortgage rates rise.

2022 is still some time away, but it’s never too early to declare 2022 the year of the financial U-turn. A wide swath of the population made money last year through rising house prices and a dizzying stock market. Stocks and housing have fallen this year, the economy is slowing, inflation and high degree of interest I’m back from the past like a rampaging dinosaur.

It’s normal during times like these to feel anxious, resentful, and wondering who is to blame. The list of those slammed so far includes the Bank of Canada, the government, supermarket chains and major banks, whose customers have been forced to pay higher as a result of rising interest rates on mortgages and other borrowings. He is believed to be pocketing payments.

A bank’s earnings and profitability have several pillars. Wealth management, which means taking deposits and lending, advising companies on mergers, acquisitions and other transactions, and selling and advising on investment products. Rising interest rates help the deposit and lending side by widening the gap between the rate charged on debt and the rate paid on deposits.

Let’s say the Bank of Canada raises the overnight rate by 0.75 percentage points. A basis point is one hundredth of a percentage point.

That means banks’ prime lending rates will rise by that amount, according to De Souza of DBRS Morningstar. “Are they going to pour that 75 basis points into deposit rates? Probably not. They offer a lower amount – that’s the spread.”

Banks will raise interest rates on deposits as borrowing costs rise, but in less predictable ways than raising borrowing costs. De Souza said deposit rates reflect how competitive banks want to be to attract lending capital. While we have recently seen very low interest rates on savings accounts, the returns from some guaranteed investment certificates are surprisingly competitive.

The difference between what the bank charges for the loan and what it pays as deposit interest is the net interest income. While recent interest rate increases have contributed to net interest income, other areas of banking are less positive.

weak stock When hook up Markets are curbing the investment boom in 2021, impacting the wealth management business. In the bank-led mutual fund business, investors redeemed his $9 billion net worth in September alone.

Also, the economic slowdown and the threat of recession will adversely affect the business of advising companies on transactions, stock issuances, etc.

When interest rates are rising, even loans become a double-edged sword, with the risk of non-payment and default. De Souza said banks deal with this risk through loan loss reserves. This is a cash reserve for increased defaults. However, these provisions come at a cost. They eat away at bank profits. Bank profits can increase due to increased interest income.

Banks’ third-quarter earnings generally declined, but were still measured in billions of dollars. The numbers for the fourth quarter we just completed will probably look similar. This result can be interpreted in several ways. One is that banks are profiting on the back of distressed borrowers and the other is that the 2022 financial U-turn will affect banks along with the economy as a whole. .

Two versions of reality, both true. The blame game is not as simple as it seems.

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