June 15, 2021
In February 2021, top Canadian banks reported their quarterly earnings, and it made headlines. The six major banks in the country beat pre-pandemic profit levels in the first quarter. The earnings not only beat expectations but surpassed them by a huge margin.
National Bank of Canada’s profits were up more than 20 per cent compared with last year while Toronto-Dominion (TD), Canadian Imperial Bank of Commerce (CIBC), and others also reported higher profitability.
Fee hikes kick in
A few months on, the banks have decided to hike charges for many services offered to customers.
Customers of TD Bank now need to maintain a minimum balance of C$5,000 in their preferred chequing accounts, instead of C$2,000. In case they fail to do so, a transaction fee of C$1.95 will kick in, instead of the earlier C$1.25.
Banks are also set to increase charges on more offerings, including overdraft protection services on select chequing accounts and wire payments.
Other big lenders, including the Bank of Montreal, Scotiabank and CBIC, are also hiking fees for at least some of their services. This follows a development in April 2021 when Canadian banks increased fixed mortgage charges to boost their profit levels.
The disconnect with wider economy
Banks and federal government are not on the same page. The government has reported unemployment levels of over 8 per cent.
In her recent interview, Employment Minister Carla Qualtrough spoke of double-digit unemployment rate among youth and how Canada “could lose this generation”.
According to Statistics Canada, annual inflation rate accelerated to 3.4 per cent in April compared with a year ago. To lift the economy out of slowdown, the Bank of Canada has maintained policy rates at record lows.
The central bank also recently warned of high household indebtedness in Canada, and how such vulnerabilities “can lead to calamities”.
In this scenario, the decision by Canadian banks to hike fees on various customer offerings appears off the track.
Amid economic stress, it is government schemes, including Canada Emergency Wage Subsidy, Canada Emergency Rent Subsidy, and Lockdown Support that have put cash in pockets of people and, in turn, businesses. The programmes will end sooner or later, and the liquidity in the Canadian market will be under pressure. Fee hikes amid low liquidity levels may have a negative impact on both bank customers and the large audience.
Impact on TSX bank stocks
Stock markets rely on investors’ sentiments. Canadian lenders have substantial share in TSX market capitalization, and banks stocks are preferred over growing companies owing to their dividend growth rate.
Indeed, increased profitability makes banks’ stocks a good addition to a portfolio. But as institutions that manage money for savers and borrowers, this profitability cannot come from stressed customers. On the contrary, banks must factor in one of the biggest disruptions in mankind’s history triggered by the COVID-19 pandemic.
Banks are the backbone of any economy. They provide services that underpin all other economic activities.
In this sense, they provide essential services to individuals and businesses. Such services need to have reasonable profit margins that do not harm the interests of customers.
The Bank of Canada and the federal government need to assure that their policy actions aimed at lifting the Canadian economy out of stress are not undermined by banks’ mistimed decision of raising customer charges.
Kunal Sawhney is the founder and CEO of Kalkine. An accomplished financial professional, he has extensive expertise in equity markets and adopts quantitative and qualitative stock selection practices.
