When the bank is down, it’s down for the taking, says RBC report
- by admin
The Canadian Bankers Association has issued a warning to banks after the bank’s financial performance declined to its lowest level since 2011.
In a report released on Monday, the association noted that banks are still operating on borrowed funds, which can provide the foundation for a large loan, as long as they are able to refinance their debt at higher rates than they otherwise would.
In that scenario, the bank would likely be able to make more profit if it refinances the debt at the higher rate, said the association’s chief economist, David Madani.
It is possible, for example, that the bank might refinance its debt at less than the market rate, which would mean it would have to repay the amount over the life of the loan, rather than having the money be used to pay off the principal and interest of the debt, he said.
The association said that in the past, the average rate of interest on credit cards has averaged about 1.5 per cent per year.
But with the cost of credit cards increasing, the typical loan rate is expected to be closer to 2 per cent over the next several years.
That would increase the bank interest rate by nearly half a percentage point in that time.
It also noted that the average interest rate on consumer loans is currently hovering around 3.5-per-cent, which is well below the Bank of Canada’s target of 4 per cent.RBC analysts believe the bank will need to refinances more debt to recover from the negative impact on its earnings, which it attributed to a variety of factors, including its deteriorating credit quality.
It has been forced to borrow money to meet its obligations, including paying off credit card and auto-lending agreements, the report said.
Risk and reward is a key part of the business model, said Madani, who also served as a senior adviser to former Bank of Montreal chief executive Officer Tony Clement.
That means the bank needs to continue to make the necessary investments in its capital ratios and its operating income, he added.
But it can do that by making a significant number of loans to its clients, Madani said.
And it is doing that, he noted, by increasing the rate of borrowing from 5.5 to 6 per cent on some loans, and by increasing lending to its financial partners, such as banks.
It’s been able to do that, said Paul Leblanc, president of RBC Wealth Management, who was appointed to the bank board last month.
It means that the rate on its credit cards is increasing, and that’s helping to fuel demand for its products, said Leblac, who noted that its overall debt to assets ratio is now at 60 per cent, which was its highest level in a decade.
In recent years, banks have been able in part to rely on the value of its credit lines to fund the purchase of new equipment and equipment that would otherwise be held back by the economic downturn, Madane said.
It appears the bank has decided that that’s no longer the case, he warned.
The Canadian Bankers Association has issued a warning to banks after the bank’s financial performance declined to its lowest level…