After five years of low rates and countless false alarms about rate hikes, the Big Six and their investors are barely fazed by the Bank of Canada's gloomier outlook.
Since governor Stephen Poloz delivered his bearish assessment Wednesday, the S&P/TSX Bank Index has actually climbed higher than where it closed the day before he gave his prognosis. Many of the Big Six stocks recently set all-time highs, so if there was any time for investors to take some profits off the table, it would be now.
But they aren't, and there's a good reason for it: even in these turbulent waters, the banks are churning out record results. Bank of Montreal, Canadian Imperial Bank of Commerce and National Bank of Canada all posted their best-ever earnings last quarter, and Toronto-Dominion Bank recorded a record profit for its Canadian personal and commercial banking unit.
It's pretty clear by now that the banks have learned to live with these setbacks. This isn't the first time a rate hike was pushed out into the future. Pretty much everyone, from the banks themselves to economists to the media, have gotten the timing of a rate hike wrong at least once, so the banks have learned to just trudge along. (Contrast that with pension funds, who are in desperate need of higher rates.)
In some respects, the low rates have already wreaked all of the havoc they can. One of the hardest hit metrics has been net interest margins – the difference between the rates at which the banks borrow and lend money. RBC's margin for its powerhouse personal and commercial Canadian unit came in at 2.83 per cent last quarter, and has hovered around that level for at least two years. While other banks haven't been as lucky – BMO's equivalent margin fell again to 2.58 per cent last quarter – they've managed to make do. BMO, remember, is one of the banks that just posted a record profit.
In fact, the banks have profited in spite of the rate environment. Although low rates hurt their margins, they also convince more people and business to borrow money. Economists have been baffled by the continued strength of the housing market, and Canadian households have yet to start deleveraging, even though their total debt levels are at all-time highs.
Admittedly, that can't last forever, and the banks are preparing for the possibility of a rough patch. They're by no means immune to shocks, and future profits certainly aren't guaranteed. Loan growth continues to slow – see slide 19 of the Bank of Canada's Monetary Policy Report – and it remains to be seen whether underwriting more and more debt will come back to haunt these financial institutions in the form of mortgage defaults or personal bankruptcies.
Some have already begun to tighten their belts. Last quarter, Toronto-Dominion Bank implied that it's ready to start an aggressive cost-cutting campaign, and Bank of Montreal has already slashed expenses and head count over the past two years.
Bank executives aren't living in a dream world. Privately, many of them say they've expected growth to slow for some time, and that their own earnings keep surprising them. At least they're mentally prepared for a slowdown, should one materialize, and that means they're already thinking about contingency plans.