A Closer Look at the Impact of Rising Rates on Canadian Banks' Profitability

This commentary reviews the impact of rising rates on Canadian banks’ profitability.
Key highlights include:

-- Material increases in provisioning for credit losses is typically due to recessions, as opposed to periods of rising interest rates.

-- Generally, rising interest rates are a positive for banks, as their balance sheets are asset-sensitive (assets will re-price higher faster than liabilities). Net interest margin should expand, bolstering profitability. An upward sloping yield curve and rising rates typically signal that the economy is expanding and doing well.

-- Canadian banks have generally been able to report higher net interest income regardless of the interest rate cycle, by growing earning assets.

“Rising interest rates are a positive for banks, as their balance sheets are asset-sensitive (assets will reprice higher faster than liabilities). Thus, net interest margins should expand, bolstering profitability. An upward sloping yield curve and rising interest rates typically signal that the economy is expanding and doing well. However, as interest rates increase, variable-rate borrowers will need to pay out more in interest on the same loan, which could pressure borrowers' ability to service their debt,” said Carl De Souza, Senior Vice President, North American FIG.