As the pandemic-era savings boom fades away, the big banks are seeing a reliable source of cheap funding dry up.
Over the past couple of years, Canadians stuffed their bank accounts with tens of billions of dollars in excess savings, which the banks, in turn, lent out in the form of mortgages and business loans.
But household finances are changing quickly for a host of reasons, from inflation and interest rates, to a resurgence of spending on travel and hospitality, to the end of emergency government benefit programs.
Soaring growth rates in bank deposits appear to be a thing of the past. “The reverse will now happen, and you’re going to see drainage at some point,” said Maria Solovieva, an economist at Toronto-Dominion Bank. “I think the banks are now preparing for that, looking for alternative funding.”
In March, Canadian corporations – primarily the big banks – tapped foreign bond markets for a total of $25-billion, bringing the trailing 12-month sum to nearly $150-billion.
Not only does that smash the previous record, it is also roughly triple the amount raised abroad by all other Canadian issuers combined over the same time period. That includes the federal and provincial governments, which still have sizable pandemic-related budget deficits to cover.
That level of fundraising represents “a truly extraordinary amount of foreign engagement in Canada,” Warren Lovely, an economist with National Bank of Canada, wrote in a recent note.
There’s a good reason the banks are so active in foreign bond markets – flooding the Canadian market with debt could inflate bond yields and widen credit spreads, which translate to higher borrowing costs.
“It’s a diversionary tactic that helps to insulate domestic credit spreads and one pursued not only by our banks but by Canada’s provincial governments too,” Mr. Lovely wrote.
As for the timing of the banks’ borrowing spree, consider that up to the end of March, loan growth in Canada remained robust, while deposit growth started to weaken.
That left a gap to be filled by capital markets funding.
In the first quarter, the Big Six banks saw their deposits grow by an average of just 0.8 per cent, with some banks already starting to see contraction, Paul Holden, an analyst at CIBC World Markets, said in a research note.
Compare that with the heart of the pandemic period, when deposits soared by nearly 30 per cent across the group.
Despite a global public-health crisis, which brought with it a monumental economic shock, household finances in Canada, on average, actually improved – the effect of copious government stimulus combined with the limitations that lockdown life put on spending.
Economists estimate the excess deposits in Canadian accounts at somewhere between $70-billion and $90-billion.
Quantitative easing – a form of stimulus whereby the Bank of Canada purchased bonds directly from the private sector, also played a role in inflating deposits in the banking system, Ms. Solovieva said.
All of that has gone into reverse. The federal government is in the process of winding down two years of emergency spending. With pandemic restrictions mostly lifted, credit card spending returned to pre-pandemic levels by the end of 2021, according to credit reporting agency TransUnion.
Meanwhile, inflation is claiming a rising share of spending, and rising rates mean that interest costs will increasingly bite into household budgets, as Canadians take on new debt or renew their mortgages.
There are additional forces drawing money out of Canadian bank accounts. Higher interest rates incentivize Canadians to move money out of deposit accounts and into fixed-income securities, Ms. Solovieva said.
Finally, the Bank of Canada has started its process of stimulus withdrawal, known as quantitative tightening, which will remove liquidity and deposits from the banking system. Rampant inflation has forced the Bank of Canada into a more aggressive timetable than anticipated, which is likely to wipe out all deposit growth by next year, Ms. Solovieva said.
And while Canada’s banks have readily accessed international debt markets, deposits are a cheaper source of funding.
“Deposit growth will become increasingly important,” Mr. Holden wrote in a note referencing National Bank of Canada. “In a rate-tightening environment and with bond … yields rising, cheap costs of funding will be essential.”
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Tim Shufelt