As Bank of Canada Governor Mark Carney frets over sluggishness in the Canadian economy, one encouraging sign has appeared: more companies are beginning to borrow again.
The central bank’s policy of low interest rates, which it has stuck to in hopes of kick-starting a recovery by encouraging companies to retool and expand, are starting to have an effect, according to officials at some of the country’s largest banks.
“We are seeing within our own business a spike up in volume,” Steve Murphy, head of commercial banking for Bank of Montreal, said in an interview. “They are starting to come out of it.”
Signs of life in commercial lending are a cause for optimism for the Canadian economy. Consumer spending, which represents the majority of economic activity, is unlikely to drive a rebound because Canadian households carry record debt levels. That’s why economists believe corporate Canada will need to lead the country out of an economic slowdown by investing and hiring.
Royal Bank of Canada is one of several banks to report promising numbers in commercial loans recently; in the fiscal second quarter, they grew 9 per cent compared to the previous year.
“Absolutely, we are seeing very strong growth in our commercial and small business lending portfolios,” David McKay, head of Canadian banking at RBC, told analysts. “I think it does indicate an overall strengthening of commercial sentiment in the marketplace.” The appetite for borrowing is being seen in the public sector, agriculture and manufacturing, RBC said.
But BMO’s Mr. Murphy said the appetite for commercial loans is still awakening slowly. Several factors, including ongoing upheaval in Europe and the threat of a financial slowdown in the U.S., have left companies reluctant to start spending again at pre-recession levels, the bank believes.
“We know that there is an opportunity…with the relatively low cost of borrowing, and the good payback on those kinds of investments… it’s a good time to look at your physical plant, your equipment – is it as modern as it needs to be?” Mr. Murphy said.
“But there is conservatism for sure in terms of the kind of leverage companies want to take on.”
The Bank of Canada’s business outlook survey for July showed firms across the country expect to increase investment in the year ahead.
Of the roughly 100 firms surveyed, 43 per cent said spending on machinery and equipment would be higher in the year ahead, 38 per cent said it would be about the same, while only 19 per cent said it would drop. The survey also found that for large firms, access to loans is getting easier.
Still, Mr. Carney has been less than bullish of late. In his quarterly forecast last week, Mr. Carney cut Canada’s growth projections for 2012 and 2013, and extended out the timeline for when he expects the economy to be running at full steam.
The Canadian economy grew at a 1.8-per-cent pace in the second quarter, which is behind the 2.5-per-cent the Bank of Canada predicted in April.
“There is a very small amount of excess capacity in this economy,” Mr. Carney said, as the central bank forecast hinted interest rates would stay low for the foreseeable future.
Mr. Murphy said his focus is to grow BMO’s commercial loan business in three regions where the bank sees promising signs of growth after several years of inactivity following the economic downturn.
Southwestern Ontario, the Greater Toronto Area and Quebec are markets where the bank expects to see demand for borrowing awaken.
“They’re not back to pre-2008 levels. But I think there is evidence certainly in what we’re seeing that there is an opportunity for growth and for our portfolio to grow in those markets,” he said.
BMO has expanded its commercial banking business as a result, battling rivals Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia and Canadian Imperial Bank of Commerce to claim more of the commercial lending market.
The bank has hired 180 small-business bankers over the last 18 months that are focused on lending up to $250,000.
It’s also in the process of hiring 70 commercial bankers handling loans of up to $10-million. That is a considerable increase on a base of about 650 commercial and small business bankers, Mr. Murphy said.