Some Canadian banks say they’re starting to question how aggressively they go after mortgage customers amid intense competition.
Speaking at the Scotiabank Financials Summit on Wednesday, RBC chief executive Dave McKay said the bank is being more careful when making mortgage offers that wouldn’t meet its threshold rate of return, or hurdle rate.
“We’ve been more careful in saying we won’t chase hot money, where our customer’s just shopping their mortgage at a below hurdle rate.”
The hesitance comes as elevated interest rates have led to a slowdown in the housing market and slower growth in mortgages, meaning banks have to compete harder for business.
“They talk about Canada as being an oligopoly. It is a ruthless oligopoly, ruthlessly competitive,” said McKay.
He said that while the U.S. banking industry was able to pass on its higher costs to borrowers, that isn’t the case here.
“In Canada, we’ve absorbed them; we’ve competed them away and we’ve absorbed them into our margins through competition.”
While McKay laments the thinning margins, he said the bank will still go aggressively for the right clients.
“Where we sense there’s a multi-product, longer term relationship with a customer, we’ll certainly go after that hard.”
Scotiabank chief executive Scott Thomson has made multi-product relationships a key focus of the new strategy at the bank, and that’s playing out in its mortgage business.
The bank has reduced the number of clients who only have a mortgage with the bank by around 14% over the past 18 months, said Thomson, as it pushes more toward value over volume.
The focus means the bank also won’t be fighting as hard for a single customer shopping for the best mortgage rate, he said.
“Will we be willing to think about a competitive price when we have multi-product? Absolutely. Will we think about a competitive price when it’s a mono-line relationship; probably not.”
The mortgage market could pick up as rates tick down, with the latest drop from the Bank of Canada just on Wednesday. The central bank’s target rate is now 4.25%, while some banks see rates coming down another 1.75 percentage points by the end of next year.
Canada’s Big Six banks announced on Wednesday they would reduce their prime rates to match the central bank’s quarter-point reduction, posting prime rates of 6.45%.
But the buffer that banks have added to the prime rate remains elevated, even with higher competition. From the mid-1990s to 2008, the added margin averaged around 1.5 percentage points. It rose to 1.75 percentage points until around 2015, and since then has stood at around two percentage points added to the bank rate.
However, banks expect customers to negotiate down from posted rates, making it less clear what actual margins banks are operating on in their mortgage business.
And even as lowering rates could spur more demand, McKay said the bank is working to reduce costs in its mortgage business because of potential continued pressure ahead.
“We’re trying to kind of re-engineer the business towards maybe a longer term, lower-margin business.”
Along with competition in the lending business, a big focus of the day was the outlook on U.S. expansion. What had been a promising growth area has become more questioned lately as TD Bank Group continues to deal with investigations into its anti-money laundering program and BMO in recent quarters has reported surprisingly high provisions for credit losses stemming from the U.S. market.
TD chief executive Bharat Masrani continues to assure that the bank is fixing its problems after guiding in its quarterly results that it expects monetary penalties of around US$3 billion and a resolution of the case by year end.
He emphasized the potential for the U.S. market is still strong, even if the bank is pulling back from growth plans.
“The fundamentals of our U.S. business is a strong franchise in very important markets, that has not changed,” Masrani said.
BMO chief executive Darryl White said the issues in its U.S. operations stemmed largely from the pandemic era at a small number of clients, while its acquisition of Bank of the West had the unfortunate timing of being closed before high-profile U.S. bank failures last year.
But he said it’s only a matter of time before things turn around.
“I acknowledge the popularity index on investment in the U.S. is not very high right now,” said White.
“We will get there. Nothing’s changed on our expectations, and nothing’s changed on our confidence level. It’s a timing issue.”