Skip to main content

Bank towers are seen in the financial district in Toronto, January 28, 2013. Canada’s big banks reduced their prime lending rates in the wake of the Bank of Canada’s unexpected move last week, but stopped short of matching the central bank’s quarter-percentage-point cut in a bid to protect profits.MARK BLINCH/Reuters

Canada's big banks reduced their prime lending rates in the wake of the Bank of Canada's unexpected move last week, but stopped short of matching the central bank's quarter-percentage-point cut in a bid to protect profits.

Royal Bank of Canada was first to announce Tuesday that it would cut its rate by 0.15 percentage points to 2.85 per cent on Wednesday. Toronto-Dominion Bank, Bank of Montreal, Canadian Imperial Bank of Commerce, National Bank of Canada and Bank of Nova Scotia swiftly followed suit with identical cuts.

The prime rate drops came a week after the Bank of Canada lowered its overnight lending rate by 0.25 points, and amid mounting speculation that lenders were under pressure from Ottawa to pass along the central bank's monetary stimulus. RBC was also the first to slash five-year fixed-rate mortgage rates over the weekend, as Government of Canada bond yields touched record lows. But banks had held off touching their prime rates, drawing the ire of consumers who had expected lower rates on their variable-rate mortgages, lines of credit and loans.

RBC said in a statement that its rate cut was driven by "a number of factors," not solely the Bank of Canada rate. Traditionally, bank prime rates move in lockstep with the central bank, but RBC said it now factors in other variables, such as the industry's competitive landscape as well as the bank's funding costs. The latter includes the rate it pays depositors as well as the rate it must pay to borrow money in debt markets.

Historically, the country's two largest banks, RBC and TD, have tended to be the first to act on central bank rate changes, said David McVay of McVay and Associates, a financial services industry consultant. Last week, TD announced it was holding its prime rate at 3 per cent, sending a signal to smaller banks to delay rate cuts. RBC's move on Tuesday changed the game.

But in lowering their prime rates, banks opted not to fully match the central bank rate cut, choosing instead to protect their profit margins as spreads between the rates at which banks borrow and lend money have bottomed out.

The big banks hadn't changed their prime rates since September, 2010. The prime rate has never fallen by less than a quarter point since the Bank of Canada began tracking such data in 1935, said Robert McLister, founder of "Bottom line, banks saw this as an opportunity to retain profit in the face of margin pressures that have been building for a few years," he said.

With retail lending growth slowing amid a drop in oil prices, banks have been under pressure from shareholders to boost their profits by 10 per cent a year, a tough target. Some had begun slashing expenses in order to shore up profits even before the central bank rate cut.

"I'd say [banks] are being prudent in that they are trying to pass the benefits," Mr. McVay said. "They've reduced their mortgage rates and reduced the prime rate, not as much as the bank rate has gone down, but as much as they consider prudent given the profit pressures they're under right now."

With the major lenders slashing their prime rates, there is little room for banks to compete for market share on price alone.

Finance Minister Joe Oliver's office declined to comment on the banks' rate cuts, saying the government has no plans to get involved in the daily operations of the banks. "That is a decision for the banks to make," said Mr. Oliver's press secretary Nick Bergamini.

With files from reporter Tim Kiladze