Royal Bank of Canada and Bank of Nova Scotia said on Monday they would reduce their prime rates by 50 basis points to 2.95 per cent, the lowest level since August 2017, passing on to borrowers in full the Bank of Canada’s second interest rate cut this month.
With other banks likely to follow, the resulting shrinking of margins is set to combine with a potential recession to create a bleaker-than-expected year for Canadian lenders, investors said.
The Bank of Canada lowered its benchmark rate on Friday as an emergency measure, following a half-point cut less than 10 days earlier. The U.S. Federal Reserve followed, slashing its borrowing rate to near zero on Sunday.
All of Canada’s major banks matched the Bank of Canada’s earlier rate cut. Royal Bank and Scotiabank said the latest cuts will take effect on Tuesday.
“The rate cuts are damage control, but it’s going to be too little too late,” said Brian Madden, portfolio manager at Goodreid Investment Counsel. He has changed his expectation to earnings declines for banks this year from low-single-digit growth.
Canadian banks had their worst year for earnings growth last year since the financial crisis.
“The modern economy is run on confidence and credit… if we each tighten the belt 1 per cent or 2 per cent, when the economy is only growing at 1 per cent or 2 per cent, you have a recession,” Madden said.
During the Bank of Canada’s prior rate cuts, in January and July of 2015, the banks passed on only 30 basis points of the 50-basis-point cuts, but matched the central bank’s three quarter-percentage-point increases in 2018.
The choice to use monetary policy first, rather than fiscal stimulus, will also have limited impact and fail to stave off a recession, said Norman Levine, managing director of Portfolio Management Corp.
RBC chief executive Dave McKay said last week that rate cuts alone are unlikely to protect against the economic fallout of the pandemic.
While banks could benefit from higher trading fees due to the volatility in markets resulting from fears about the pandemic, other areas, such as wealth management, would be hurt by the decline in consumer confidence, said Allan Small, senior investment adviser at Allan Small Financial Group with HollisWealth.
“Banks are the bloodline for the economy,” Small said. “If the economy is slowing, banks are going to slow.”