Show Me the Money

IN THE PAST YEAR, THE FEDERAL GOVERNMENT HAS RAISED ITS KEY INTEREST RATE AND INTRODUCED NEW FINANCIAL REGULATIONS. WHAT DOES THIS MEAN FOR B.C.'S BANKING SECTOR?

Adecade ago, the global financial crisis pushed central banks to slash interest rates in an attempt to stimulate the economy. In Canada, the key rate dropped to a record low of 0.25 percent in early 2009, rising slightly the following year. Then in 2017 the Bank of Canada ( BOC) cautiously started raising its rate, which has been a giddy 1.25 percent since the beginning of this year.

The upward trend is a signal from the BOC that the economy is strong, points out Mal Grewal, B.C. financial services practice leader with EY (Ernst & Young) in Vancouver. That’s generally a good sign for investment banking, Grewal notes. “The last few years have been relatively tough, [ but] starting in January we started to see the number of banking deals increase quite dramatically,” including activity in new sectors like

cryptocurrency and cannabis, he remarks.

“Rising interest rates typically would be a good thing from a bank or credit union perspective because they make money off the spread, what they can borrow money for and what they can lend it out to their clients at,” Grewal observes. “That spread has been depressed recently due to historically low interest rates.” One beneficiary appears to be HSBC Bank Canada, the only major bank based in B.C. and No. 25 on this year’s Top 100 list. HSBC’S net interest income grew 4.4 percent from 2016 to 2017 and 8.5 percent year-over-year in the first quarter of 2018. The bank’s published results attribute the increase to growth in loans and advances, in particular mortgage balances; interest recovered on impaired loans; and BOC rate changes.

Net interest income is a much bigger part of credit unions’ business than it is for banks, explains David Gaskin, CFO of Surrey-headquartered Coast Capital Savings Credit Union, which sits at No. 88 in this year’s ranking. “We’re not as diversified, so interest rate changes do have a more significant impact to our revenue sources,” he says. Although yields from assets like loans and mortgages kept dropping, interest paid on deposits couldn’t go any lower, so margins were being squeezed. Gaskin adds that as interest rates start rising, so will assets, but it remains to be seen whether deposits will increase.

Regulatory changes are another challenge. In 2016, Canada Mortgage and Housing Corp. made it tougher for lenders to buy bulk insurance for their portfolios of uninsured mortgages, bundle them and use them to securitize, Gaskin notes. Consequently, deposits are more valuable, so while interest rates on chequing accounts haven’t climbed, there’s more competition to generate term and other deposits.

This January the Office of the Superintendent of Financial Institutions Canada (OSFI) introduced Guideline B-20, a so- called stress test that raises the bar to qualify for a highratio mortgage from a federally regulated financial institution. Most credit unions are provincially regulated and not subject to B-20, but Coast Capital, which will become Canada’s second federal credit union this fall, plans to adopt the test on July 1. As a result, borrowers will have to seek other sources of funding or buy a smaller house so it commits them to less debt, Gaskin points out.

That’s a good thing, according to EY’S Grewal. “It actually is a bit of a risk mitigator for the financial industry, because it’s forced the lending institutions to make sure that loans they’re issuing are to qualified individuals,” he says. “The Canadian financial system held out amazingly well during the credit crisis a decade ago, and a lot of that’s due to the regulation that’s imposed on Canadian banks and credit unions.”

But with B-20 reducing the number of qualified borrowers, banks are competing for a shrinking pool of potential customers. Variable rate mortgages generally move in line with the BOC benchmark overnight rate, Grewal observes. “Interestingly, however, we have seen recently that as the Bank of Canada has increased its benchmark rate, some of the major lenders have decreased their variable mortgage rates,” he says. “This is contrary to the norm.”

In May, HSBC Canada dropped its mortgage rates for new and existing customers to 2.39 percent on a five-year variable rate mortgage and

VARIABLE RATE MORTGAGES GENERALLY MOVE WITH THE BENCHMARK OVERNIGHT RATE. “HOWEVER, WE HAVE SEEN RECENTLY THAT AS THE BANK OF CANADA HAS INCREASED ITS BENCHMARK RATE, SOME OF THE MAJOR LENDERS HAVE DECREASED THEIR VARIABLE MORTGAGE RATES” –MAL GREWAL, EY

3.09 percent on a five-year fixed highratio mortgage. “We look at mortgages as a good starting point for a broader relationship,” says CEO Sandra Stuart. “We want to earn Canadians’ business and help them achieve their financial and personal goals—and as part of that, we’re offering great rates on mortgages, and as a result, we are growing.”

Last year HSBC’S relationship balances ( lending, deposits and wealth management) grew 7.8 percent. The bank attributes that trend to strong branding, innovation and improved client services, from extending branch hours to relaunching a self- directed brokerage platform ( HSBC Investdirect); and introducing Apple Pay, Live Sign for remote signing of documents, mobile cheque deposit and live chat for online banking.

Gaskin says that as a smaller institution, Coast Capital is interested in providing new and exciting digital tools for its members but is a fast follower: “We’re not going to be spending the kind of bucks that the banks are doing in terms of coming up with bleeding-edgetype technology.”

EY’S Grewal has noticed an uptick in the adoption of fintech. Although Canada has been relatively strong when it comes to embracing technology, he remarks, Canadians are loyal to their banks and credit unions, which haven’t been as quick to adopt fintech. “The banks and credit unions are now in a state where they’re starting to partner more with fintech entities.”

Gaskin agrees. Two or three years ago, he recalls, fintechs were looking for funding or referrals so were perceived as competition for customers. “I think the realization the fintechs had, though, was that the banks and credit unions have a loyal customer base,” he suggests, adding that for many transactions, it’s difficult to shift people away from banks unless they’ve done something to really irritate their clients.

Fintechs are becoming partners, vendors or solution providers. Take the move to launch digital membership at Coast Capital, where becoming a member previously required visiting a branch. Now, thanks to the services of a Canadian fintech, everything can be done online, including buying the $5 worth of Coast Capital shares needed for membership.

Gaskin notes that digital services will cost Coast Capital the same whether it’s provincially or federally regulated, so increasing scale is a benefit. Becoming a federal credit union also provides more mobility for members, particularly small businesses, if they expand outside B.C. “As we go across the country, we would like to be able to have other national partners [while] making sure we stay grounded in the communities that we serve,” Gaskin explains.

TWO OR THREE YEARS AGO, FINTECHS WERE PERCEIVED AS COMPETITION FOR CUSTOMERS. “I THINK THE REALIZATION THE FINTECHS HAD, THOUGH, WAS THAT THE BANKS AND CREDIT UNIONS HAVE A LOYAL CUSTOMER BASE” –DAVID GASKIN, COAST CAPITAL SAVINGS