Average mortgage growth among the Big Six banks has accelerated over the last few quarters
Despite the expected increase in interest rates next year, an “outsized” dependence on mortgages might prove to be a drag on Canadian banks’ net interest margins in 2022, according to analysts.
Currently, mortgages represent approximately 67% of Canadian household loans, up from 64.5% in 2019, per estimates by Reuters. The Big Six showed average mortgage growth of 11% annually during Q4, a rate that has increased over the past few quarters.
Given this distribution and composition of loans, “an interest rate increase would take a little bit more time to work through the banks’ margins,” said Rob Colangelo, vice president and senior credit officer at Moody’s Investors Service.
Read more: Market activity could surge before rate hikes, say analysts
Another major element of these market dynamics is that the global health crisis is showing no signs of slowing down, said Mike Clare, portfolio manager at Brompton Group.
While margin recovery could very well accompany interest rate hikes, “the biggest uncertainty is around the new [Omicron] variant and what that may do to business activity,” Clare said. “We could potentially have an environment where growth isn’t as high as expected but inflation remains elevated.”
Mounting expenses are also likely to hinder the banks’ net interest margins, said James Shanahan, analyst at Edward Jones.
“It’s a significant challenge, and highlights the importance of revenue growth,” Shanahan said. “[The banks] have to generate some loan growth and margin expansion or they’re going to have a difficult time outgrowing their operating expense growth.”
