January 27, 2015 Comments

On Tuesday the S&P 500 lost 1.3% but Toronto was up 0.2%

Some disappointing earnings reports in the U.S. pulled the market down. In particular Caterpillar and Proctor and Gamble had earnings that were hurt by the high U.S. dollar (or the decline in almost all other currencies if you consider the U.S. dollar as the reference point). I had mentioned under January 8, that I was expecting to see this impact.

Among the losers today were Visa down 2.2% and eBay down 2.4%.

One of today’s headlines talked about mortgage price wars at the Canadian Banks. That is as it should be in a competitive market. But while it lowers borrowing costs it is clearly a negative for the banks.

There has been a lot of talk the past few days of how the banks were refusing to pass along the saving from the 0.25% bank of Canada rate hike. (Although some have started to now but not the full 0.25% they are alleged to be saving). The problem with this logic is that there may very well have been little or no net savings to pass along. The Banks do not normally borrow from the Bank of Canada (though they can in emergencies). Instead they have deposits at the Bank of Canada – which may be earning less with the rate cut

The Bank of Canada target rate is the rate that the Bank of Canada encourages banks to lend to each other at. If banks are lending to each other and the rate drops, then the savings for one bank is a revenue reduction for another bank – and nets to zero for banks overall. Also I am not sure if much money is actually loaned between banks.

Here is how the Bank of Canada defines the overnight target rate

“The target for the overnight rate is the average interest rate that the Bank wants to see in the marketplace for one-day (or overnight) loans between financial institutions. Changes in this rate influence other interest rates, such as those for consumer loans and mortgages.

As I understand it banks fund at least a portion of variable rate loans with the type of deposits on which they were already paying precisely nothing. That being the case the drop in the Bank of Canada rate would not lower the funding cost for those deposits. The funding cost was already sitting on the floor.

People can say what ever they want about banks, but the FACT is that the spread or gross profit earned by Canadian banks declined from an average 2.70% in fiscal 2012. to 2.41% in fiscal 2013 and from 2.52% in October 2013 to 2.39% in July 2014. These figures are from the Canadian Bankers Association.



The internet is a wonderful thing and allows everyone to have their say. The down-side of that is that a great deal of misinformation is published and passed along every day. Any just because the press is full of stories about banks failing to pass along a reduction in costs does mean there is much truth to it. (As noted there may actually have been little or no cost reduction to pass along)

Banks in fact lowered their longer-term fixed rate mortgages this past week because their funding costs were lower in the bond market (not due to the bank of Canada) and because competition forced them to.

Most Canadians and most of the financial press are very fond of describing the Canadian Banks as an oligopoly with very limited competition. Yet these banks are offering the lowest interest rates in history. And there are 6 major banks in Canada and a handful of smaller schedule 1 banks and quite a few foreign banks operating here and lots of credit unions. I am hard pressed to think of any industry that offers more choices of competitors than the banks do.

The reason banks are quite profitable is that they tend not to compete aggressively on many of their service fees. And that is due in large measure to the fact that we all as customers find it inconvenient to shop around and switch banks frequently.

Those who want lower bank fees need to shop around more aggressively and be prepared to put up with the inconvenience of switching banks frequently for the best deals.

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