Bank of Canada’s surprise rate cut seen hurting Canadian banks’ profits

Expect the squeeze on Net Interest Margins and the deterioration of loan books to signal lower profitability and (eventually) job cuts.

Financial Post

The surprise rate cut by the Bank of Canada on Wednesday is expected to contribute to a dampening profit picture for Canada’s banks, according to an analyst at Moody’s Investors Service.

“Persistently low rates create profitability headwinds which combined with lower consumer credit growth will dampen the profit picture for Canadian banks in 2015,” said David Beattie, senior vice-president in the financial services group at Moody’s.

He said low rates would compress the closely watched net interest margin, which measures the difference between interest income earned by the banks and the amount of interest paid out to their customers including depositors, relative to the amount of their interest earning assets. As for the banks’ cost of capital, the rate cut “will not move the dial,” Mr. Beattie said.

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The central bank shocked markets Wednesday morning by cutting the overnight rate to 0.75% from 1%, the first movement in…

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