This text is taken from Courrier de l’économie. Click here to subscribe.
Although essential to the functioning of the economy, banks still rank high among the least popular businesses. The case should not get better with the rapid increase in interest rates, especially since this increase is not always the same between the interest that we owe them and that which they owe. pay us. To whom do the profits generated by these rate increases go? asks a reader, Patrick Léonard.
We are not fooled if we have the impression that financial institutions have relayed as quickly as possible the increase, over the past year, of 4.25 percentage points in the Bank of Canada’s key rate to interest rates mortgage loans or lines of credit while those received by their depositors for their humble savings accounts and checking accounts have remained at ground level, says Claudia Champagne, professor of finance at the University of Sherbrooke.
Sometimes banks offer less starving rates to entice new customers, she notes, but that never stays in effect for long. This is partly due to the fact that these so-called “savings accounts” are now seen more as a tool for “everyday transactions and that when people want to save, they often turn to somewhat more sophisticated vehicles, such as term deposits and investment funds, whose rates of return are much more linked to interest rates”.
Variable according to the financial institutions, the relative importance of individual customers in their turnover remains high. But their financial results and profits also depend on other sectors of activity, such as business services, wealth management and insurance.
However, a rise in central bank interest rates usually heralds an economic slowdown, or even a recession, which suggests a slowdown in business opportunities and an increase in the number of borrowers who will default. In anticipation, banks must tighten their loan conditions and set aside larger provisions to absorb losses. Which, in any case, will affect their results, observes Claudia Champagne.
Five of the six largest Canadian banks, as well as Desjardins Group, have reported, in their most recent financial results, either a stagnation or a decline in their profits compared to the same period a year earlier. This loss of return has not escaped the stock markets, with the Banks component of the S&P/TSX index on the Toronto Stock Exchange posting a decline of 11% over the past year.
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