TORONTO (Reuters) - Canada’s three biggest lenders said the Bank of Canada’s decision to raise interest rates on Wednesday would boost their profits over the next year, although one executive warned the central bank not to lift rates too quickly.
The Bank of Canada surprised many when it hiked rates and left the door open to more rate increases in 2017 even as it pledged to pay attention to how higher borrowing costs would hit Canada’s indebted households.
Royal Bank of Canada’s Chief Executive Dave McKay said he expected the decision to raise interest rates to add more than C$300 million ($245 million) to revenues at the country’s biggest bank over 5 years.
“I would say a 25-basis-point increase in rates should benefit our retail franchise in the first year roughly by C$100 million but increase to upwards of C$300 million by year five as it takes a while to blend into the portfolio,” McKay said at the Scotiabank Financials Summit.
Rising interest rates allow banks to make higher profits by improving their net interest margins, the difference between what they pay to attract deposits and what they charge to lend money.
Bank of Nova Scotia CEO Brian Porter said that the latest hike and a previous increase of 25 basis points in July would add 2 to 3 basis points in 2018 to the net interest margin achieved by the bank’s Canadian business. He did not quantify how much revenue that equates to.
Toronto-Dominion Bank’s CEO Bharat Masrani also said rising rates would be good for his bank, Canada’s second-biggest lender, as long as they proceed at a moderate pace.
“If you believe that we are in a rising rate environment then I think generally speaking it’s a positive event for TD as long as the rate hikes are in an orderly fashion and do not tip the economy into a major slowdown,” Masrani said.
“The stage we are at in the cycle I would think that, for a while at least, this will be a positive phenomenon,” he added.
Masrani declined to quantify the anticipated boost to the bank’s revenues from the latest interest rate increase.
RBC said on Wednesday that it would increase its prime lending rate by 25 basis points to 3.2 percent, effective Thursday. The prime lending rate is used by banks to set interest rates for variable-rate mortgages and other loans.
TD also said it would raise its prime lending rate by 25 basis points to 3.2 percent, effective Thursday.
($1 = 1.2225 Canadian dollars)
Reporting by Matt Scuffham; Editing by Chizu Nomiyama and Meredith Mazzilli