The chief executives of some of Canada’s largest lenders met at a conference to discuss the increasing cost of borrowing for U.S. banks, and Canadian lenders that operate in the U.S.subman/iStockPhoto / Getty Images
The chief executives of some of Canada’s largest lenders are saying that mounting challenges in the U.S. banking sector are weighing on growth, in part by making it more expensive to do business in the American market.
The comments came in remarks at a Wednesday conference hosted in Toronto by the Bank of Nova Scotia BNS-T. The CEOs cited funding pressures and regulatory uncertainties they said are making it trickier to operate in an already sour economic environment.
U.S. banks, and Canadian lenders that operate in the U.S., are facing tougher competition for deposits. At the same time, lenders are grappling with rising interest rates that force them to pay more for those deposits, even as the increasing cost of borrowing erodes the value of the bonds they use to help fund their balance sheets.
Third-quarter net interest margins (the differences in the amounts lenders earn on loans and pay on deposits) in the personal and commercial banking units of the U.S. and international divisions of Canada’s biggest banks fell 11 basis points on average from the previous quarter.
Meanwhile, the banks’ Canadian units saw an average jump of four basis points, according to analyst research by CIBC Capital Markets. (A basis point is one-hundredth of a percentage point.)
Royal Bank of Canada RY-T chief executive officer Dave McKay told Wednesday’s conference that uncertainties related to the way customers are managing their cash are weighing on the growth outlook in the U.S., as are regulatory changes prompted by the fallout from Silicon Valley Bank’s collapse.
“The U.S. economy is performing very strongly, but the U.S. banking system is not performing very strongly compared to that,” Mr. McKay said.
He added that there are few acquisition opportunities in the U.S. that fit RBC’s culture and strategy. He said the bank is focused on building its commercial and wealth-management businesses while cutting costs.
“It was a challenging quarter. Everything ran against us,” Mr. McKay said. He predicted RBC’s business would stabilize in the fourth quarter “and improve next year.”
Earlier this week, Bank of Montreal BMO-T completed its integration of California-based Bank of the West, which it acquired in February. Darryl White, BMO’s CEO, said the bank is on track to meet its previous estimates of cost savings from the takeover.
While the bank still expects to hit its targets for revenue synergies – which include savings from streamlining similar products and services – Mr. White said the tougher economic environment in the U.S. could extend BMO’s three-to-five-year timeline for reaching those targets by a few quarters.
“Might it be softer today than it was when we made those assumptions? The whole world is softer,” he said.
He said his comments were not meant to be interpreted as a change in the lender’s forecast on the Bank of the West integration, but rather as an update to say the takeover is progressing “at least as well” as BMO thought it would.
Scotiabank has been working on changing its strategy under its CEO, Scott Thomson, who formally stepped into the top job in February. While the bank has yet to unveil its new plan, it has said a key tenet will be growing its U.S. businesses.
Mr. Thomson told the conference that building out Scotiabank’s capital markets and wealth banking businesses in the U.S. will allow the bank to cross-sell products and services to customers in its Mexico division. He noted that Mexico is expected to grow through increasing trade partnerships with the U.S.
“When you think about the trade flows between Canada, the U.S. and Mexico – the whole NAFTA region – it’s significant,” Mr. Thomson said.
Stefanie Marotta