March 14, 2023 noon eastern

Markets are staging a nice recovery today with the S&P 500 up 1.9% and Toronto up 1.2%.

I have some thoughts on the banks:

The banks are paying 4.75% (RBC) to 4.92% (Canadian Western bank) on one year GICs.

Obviously they have to charge interest rates in the range of about 6.75% or higher to make a reasonable spread on those deposit costs.

Clearly some individuals and businesses are facing high borrowing costs. Unsecured personal lines of credit are at about 9.2%. Secured personal lines of credit are at about 7.2%.

Banks are getting squeezed int he short term becasue many loans do not reset higher as fast as deposit costs have reset. That will lower their income or the growth in income but is not a serious problem and is only short-term.

More seriously, I think it is inevitable that we will start hearing about more businesses and individuals who can’t meet these higher interest costs.

I would think anyone who can will be paying down lines of credit and other debt.

I suspect banks will see little or no loan growth in 2023. And, as loans are paid that also reduces deposits.

The banks also of course face higher credit risks (loan losses).

Overall, I would be cautious about bank earnings. On the other hand the Canadian banks tend to trade at low multiples of earnings and have high dividend yields. Therefore even with a tough year for earnings, the Canadian banks are unlikely to sink too much in price.



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