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2 Sep

Analysts warn of mortgage rate hikes

General

Posted by: Mike Hattim

Canada’s big banks are raking in billions of dollars in profits, but if they want to keep doing it while the economy stumbles, look out for another boost in mortgage rates, analysts say.

Toronto-Dominion Bank announced Thursday that it earned $1.45 billion in profits during the fiscal third quarter, up from $1.18 billion in the same quarter last year. TD also boosted its dividend for the second time this year.

During the quarter, the six biggest banks in the country earned a combined $4.56 billion.

But all but BMO saw earnings drop in their capital markets divisions, the banks’ trading arms, thanks to volatility in the stock market. Banks are also likely to see lower revenues from their investment banking divisions as fewer companies do takeover deals or have initial public offerings when the economy and markets are in the tank, says analyst Brian Klock.

That, says Klock, means banks will be looking to boost earnings elsewhere, particularly in their retail banking divisions.

“I don’t think they’re going to be doing it by nickel and diming customers on their fees. The easiest way to do it is to raise mortgage rates,” said Klock, a banking analyst and senior vice-president at New York-based Keefe, Bruyette & Woods.

Klock said the other way banks can boost their bottom line is to pare their costs, something he sees TD as already having done.

“They have to look at controlling costs,” said Klock, who rates TD “outperform,” with a target price of $89 per share.

In a conference call with analysts to discuss quarterly earnings, TD CEO Ed Clark’s choice of words gave a hint of just how important the retail arm is to the company’s bottom line.

“We’ve got this amazing engine of growth in our Canadian personal banking business,” said Clark.

TD’s Canadian personal and commercial banking division posted earnings of $954 million for the quarter, up 13 per cent from last year.

Clark also added that the company is “excited” about its recent purchase of the Canadian credit card operations of MBNA, the largest MasterCard issuer in the country.

Last week, Royal Bank, BMO and CIBC raised rates on their variable mortgages, citing increased borrowing costs in the bond market.

That came as little surprise to Fred Lazar, an economics professor at York University’s Schulich School of Business. A bank’s borrowing cost may well be going up, said Lazar, but it’s tempting to tack on a little extra profit for themselves when raising the rate they charge customers.

“It’s not a one-to-one ratio. If the yields on five-year bonds go up 10 or 15 basis points, they’ll probably raise their mortgage rates 20 or 25 points,” said Lazar, adding banks are also making plenty of money from their credit card divisions.

“The spread between what they’re paying out on deposits and what they’re charging in interest is growing,” said Lazar. While banks often justify the rates they charge by saying credit cards represent a greater risk because they’re unsecured, Lazar says they’re not as risky as banks would have people believe.