Analysis-Battle for Canadian bank deposits seen heating up as rate cuts loom

investing.com:

By Nivedita Balu

TORONTO (Reuters) — Competition for customer deposits among Canadian banks is expected to intensify with the likely onset of lower interest rates as clients divert funds parked in high-yielding fixed income products to riskier investments in search of better returns, analysts and executives say.

For banks, sticky customer deposits are a cheaper source of funding that keeps costs under check and boosts lending margins.

The big Canadian banks benefited from the C$350 billion pandemic-era savings, most of which found its way into the popular Guaranteed Investment Certificates (GICs), that earn around 5% interest.

Now that pot of cash is likely to seek a new home unless banks pay up to retain deposits, which will squeeze their profit margins, analysts warn. Bank of Canada governors have agreed that rate cuts should materialize this year if the economy evolves as predicted.

«It's very likely that Canadian consumers are more demanding now than they were in the past couple of decades ago when interest rates were low,» KBW analyst Mike Rizvanovic said.

    «Even in a rate-cut cycle, Canadians are maybe a bit more demanding on their money,» Rizvanovic said, noting that consumers are less likely to keep money in demand accounts that pay low interest even when rates are declining.

Debt financing is one of the most expensive form of funding for banks. While term deposits are cheaper they are still costlier than demand deposits.

Already, Canadian banks' reliance on medium- to long-term debt and commercial paper is higher compared to their global peers. Some 36.8% of large Canadian banks funding comes from debt, compared to 26.1% for large U.S. banks' and 28% for European banks, according to the Bank of Canada