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A member enters a Vancity branch on May 12, 2007, in Vancouver.

Rafal Gerszak/The Globe and Mail

Canada’s small financial institutions are waging a war for deposits, offering customers higher interest rates to shore up funding and meet demand for deferrals and loans, despite a drop in official interest rates to a decade-low. While Canada’s biggest banks have multiple funding sources including wholesale markets, smaller players are more dependant on sticky customer deposits and earnings, particularly as credit spreads widen due to the economic fallout of the coronavirus pandemic.

Larger banks can also access government liquidity support including security purchases, and have capital buffers they can draw down, both of which are limited for smaller institutions.

“The bigger banks are well-positioned to handle a financial downturn... so they don’t need to provide the best rates,” said Brandon Brot, principal at deposit broker GIC Wealth Management. Although most deposits of up to C$100,000 are government-backed, the big banks are perceived as safer, he added.

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Existing clients have grown deposit sizes due to the higher rates, he said.

Last week, Vancity, Canada’s biggest credit union, introduced the 12-month Unity term deposit paying 3 per cent interest, more than double its other offerings.

Home Capital Group subsidiary Oaken Financial, which funds loans by sister company Home Trust, has raised its rate to 2.95 per cent for five-year guaranteed investment certificates (GICs), after initially dropping it after the first central bank rate cut, said Melonie Dixon, vice president for deposits at Home Trust.

Equitable Group’s EQ Bank pays 2.45 per cent on three-month GICs, higher than some longer-term products. Equitable declined to comment.

That contrasts with current five-year GIC rates from 1.05 per cent to 2.05 per cent at Royal Bank of Canada, TD Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada .

Vancity, where retained earnings make up almost 98 per cent of funding, introduced Unity in response to an increase in demand for loan deferrals and short-term lending due to the coronavirus pandemic, Chief Executive Tamara Vrooman told Reuters.

Lenders are offering short-term deferrals on loan repayments to ease the impact of the coronavirus pandemic.

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“There’s going to be a haircut on margins... but it’s not our first concern,” Vrooman said. In the first five days, Vancity had raised C$23.8 million of its C$200 million target.

Between 47 per cent and 61 per cent of the Big Six banks’ funding came from deposits at 2019 end, according to ratings agency Moody’s.

The Canadian banks index is down 19.6 per cent this year, while Home Capital has lost over 50 per cent and Equitable Group has slid 46 per cent.

“To the extent that smaller financial institutions use (deposits) more than big banks for funding, they’re going to compete harder for them,” said Jeremy Kronick, associate research director at think tank C.D. Howe Institute.

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