Canadian Banks' Deposit Battle Adds to Funding Cost Pressures

Competition for deposits among Canada's biggest banks is heating up for the first time since the global financial crisis, leading to higher funding costs that could crimp profit growth in their domestic businesses over the next two years, analysts say. The emerging price war adds to risks clouding the outlook and will be a key focus as banks prepare to report quarterly earnings next week. Headwinds include a slowing housing market and record household debt, which threaten to end three years of record profits. Profit margins are also being squeezed by a flattening yield curve in Canada, which hampers banks' ability to borrow at a low rate and charge customers a higher one, analysts say."I think there is some short-term pain for the large Canadian banks," said Robert Colangelo, senior vice president of the Financial Institutions Group at DBRS.Over the past decade, Canadian banks have paid next to nothing on checking accounts and relatively modest rates on savings accounts. But Eight Capital banking analyst Steve Theriault says that pattern is changing as savers demand more following five Bank of Canada rate hikes since last summer. Rates currently being offered on savings accounts are about twice what they were three years ago."It's the first time you're seeing heated competition since the financial crisis," Theriault said. Funding costs for the country's biggest seven banks - Royal Bank of Canada, TD, Scotiabank, Bank of Montreal, CIBC, National Bank of Canada and Desjardins Group [FEDES.UL] - rose an average of 49 basis points during the third quarter of 2018 from a year ago, Fitch Ratings said in a report this month.Net interest margins (NIMs), the difference between the interest they get from borrowers and what they pay to savers, were flat to slightly negative in the same period.