Rate cuts alone won’t alleviate disruption: RBC
‘You need a co-ordinated mechanism’ with fiscal stimulus, CEO Mckay says
TORONTO The chief executive of Canada’s biggest bank suggested Tuesday that government action — not just lower interest rates — is called for following the recent shock to oil prices and the ongoing coronavirus outbreak.
“I don’t think purely monetary rate cuts are going to satisfy the disruption that’s coming at corporate cash flows and consumer cash flows,” said Dave Mckay, the president and CEO of the Royal Bank of Canada.
Mckay added that “you need a co-ordinated mechanism” between reducing rates, something that happened last week when the Bank of Canada and the U.S. Federal Reserve lowered their policy benchmarks by 0.5 percentage points, and fiscal policy.
“We’re having an ongoing dialogue with governments around the world around co-ordinated and effective and targeted fiscal stimulus, whether that’s payroll tax cuts or whatever mechanism (there) has to be to inject cash flow into the economy,” the CEO said.
Just how disruptive the coronavirus has been was highlighted by Mckay’s comments coming from a “fireside chat” being conducted digitally, as RBC had decided to turn a physical conference in New York into a virtual one. The CEO said an “abundance of caution is appropriate at this time” given the global health crisis.
Mckay’s comments followed Canada’s main stock index falling the most in one day since 1987, dragging the share prices of the banks with it. The almost 10.3-percent drop experienced by the S & P/ TSX composite index on Monday came after Saudi Arabia announced it would ramp up oil output, sending crude oil prices plunging.
Central banks have cut their key rates in response to the coronavirus and are anticipated to ease monetary policy even further as both COVID-19 and the oil shock weigh on economic growth. Attention now is turning to what governments might do to try to ease the pain for consumers and businesses.
Mckay said it is “hard to predict” exactly how the economy will perform over the coming months, although there is expected to be a considerable impact felt.
“We’re preparing for tougher challenges, in energy and other sectors. But we’re also hoping that policy mechanisms can alleviate some of that pressure in the short term, particularly in small businesses and commercial enterprises.”
Where commercial banks like RBC could take a hit from the oil price war would be loans they’ve made to energy companies now facing steep discounts for their products. Canada’s big banks are not as exposed to the oil and gas sector as they once might have been, but their loan-loss models also take into account economic changes, which could force them to set aside more money for potentially bad debts going forward.
The level of oil-and-gas exposure at Canada’s Big Six banks as of approximately Jan. 31 ranged from just more than one per cent of total loans to just shy of three per cent, according to a report from National Bank Financial analyst Gabriel Dechaine. Lenders, however, had already been reporting “deteriorating credit performance” in their energy loan books.
“With the sharp decline in oil prices, though, we suspect most investors are in a, ‘How much worse can it get?’ frame of mind,” Dechaine wrote.
Any credit issues for the banks would be in addition to the pinch that rate cuts in Canada and the U.S. may put on their key profit driver: the difference between what they charge for loans and pay out to savers.
Mckay was hopeful the situation would get under control before negative interest rates, which he said can be “very difficult on the industry,” become necessary in North America. “I get that sentiment from central bankers, that we would have to expend all co-ordinated fiscal and monetary stimulus down to zero before we consider negative rates,” Mckay said, adding, “There’s a lot of policy mechanisms that will get pulled before I think you see that.”