(Toronto) Some Canadian banks say they are reassessing how hard they compete for mortgage customers.
Speaking at the Scotiabank Financials Summit on Wednesday, RBC CEO Dave McKay said the bank is being more cautious about mortgage offers that don’t meet its yield threshold, or minimum rate of return.
“We’ve been more cautious in saying we’re not going to chase hot money, which causes our customers to just compare their mortgage at a rate below the hurdle rate,” he said.
The hesitation comes as high interest rates have led to a slowdown in the housing market and slower growth in mortgage lending, meaning banks are having to fight harder for deals.
“They say Canada is an oligopoly. It’s a ruthless, ruthlessly competitive oligopoly,” McKay said.
He argued that while the U.S. banking industry was able to pass on its higher costs to borrowers, that is not the case here.
“In Canada, we absorbed them. We absorbed them into our margins because of competition,” he said.
Mr McKay laments the shrinking margins, but said the bank will continue to actively seek out the right customers.
When we feel there is a long-term, multi-product relationship with a customer, we will definitely pursue it aggressively.
Dave McKay, CEO of RBC
Scotiabank CEO Scott Thomson has made multi-product relationships a key part of the bank’s new strategy, and that’s reflected in its mortgage business.
The bank has reduced the number of mortgage-only customers with it by about 14% over the past 18 months, Mr Thomson said, as it prioritises value over volume.
This strategy also means the bank won’t fight as hard for a single customer looking for the best mortgage rate, he said.
“Will we be willing to think about competitive pricing when we have multiple products? Absolutely. Will we think about competitive pricing when it’s a one-way relationship? Probably not.”
The mortgage market could regain strength as rates fall, with the latest cut coming from the Bank of Canada on Wednesday. The central bank’s key rate is now 4.25%, with some banks anticipating an additional 1.75 percentage point cut by the end of next year.
Canada’s six major banks announced Wednesday that they would cut their prime rates to match the central bank’s quarter-point cut, posting prime rates of 6.45%.
But the margin that banks put on their preferential rates remains high, even with increased competition.
From the mid-1990s to 2008, the added margin averaged about 1.5 percentage points. It rose to 1.75 percentage points until about 2015, and since then it has been about two percentage points added to the Bank of Canada rate.
However, banks expect customers to negotiate down from posted rates, making it less clear what margins banks actually operate on in their mortgage business.
And while lower rates could boost demand, McKay said the bank is working to reduce costs in its mortgage business because of the potential continued pressure ahead. “We’re trying to reorganize the business to be maybe longer-term and lower-margin,” he said.