Friday, September 2, 2011

Chartered Banks raise mortgage interest rates while drowning in profits

By Josh Rubin, Toronto Star, September 1, 2011
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....
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.
When will it be time for the government to step in to reign in the voracious profit appetites of the chartered banks in Canada? Growing the spread between what they pay out on deposits and what they charge in interest feeds only their own corporate greed, and let's not tip-toe around the dynamic.
While it is true that our chartered banks are among the most secure in the world, with respect to their capitalization, they are not, and must not be treated as a religious institution. They are, after all, at the centre of the economic activity and their record of treatment of the ordinary Canadian is never going to be inscribed in the "social conscience" sector of the World Encyclopedia.
These banks are little more than capitalist monsters, in bed with the current and most previous governments, cowing most legislators and most governments provincial and federal into submission to their avarice, at the expense of the ordinary Canadian. And their shareholders are their masters, demanding more and more profits and dividends.
It is time we had a government who would stand face-to-face with these monsters and demand that they serve the public in a more economical and less greedy manner, and reducing the spread between their pay-outs and their interest charges would be a good place to start.


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