Loan Refinancings: Another Boost for Banks

By Tara Perkins

Rising interest rates are inevitably going to curtail the growth that Canadian banks’ consumer loan books are showing, but the banks are being presented with another opportunity that should help compensate for the hit, National Bank Financial analyst Rob Sedran wrote in a note to clients Wednesday.

There is roughly $194 billion of Canadian corporate loans maturing the next three years, with much of that occurring in 2012, he said. Of that, about 45% belongs to the country’s six largest banks. Given where interest rates currently are, some companies' forward-looking CFOs are likely going to refinance early, and that could boost asset growth for the banks.

“Of course, the opportunity here is not simply to replace existing commitments with new ones,” Mr. Sedran wrote. “The opportunity, in our view, is to continue to gain share on rivals that remain capital-constrained. Simply put, we suspect that a syndicate with which a loan was negotiated three years ago is unlikely to be the syndicate with which a renewal is negotiated.”

With the Big Six in relatively good shape, they should be able to gain market share from struggling rivals, he said.

“Moreover, although spreads have come in as markets have recovered, the spreads at which the new business is written should prove to be considerably more profitable than the loans they are replacing.”

Every 10% increase in business and government loans yields a 3% average profit increase for the Big Six banks, he said.

Editor's note: U.S.-traded Canadian bank stocks:

• Royal Bank Of Canada (RY)
• Bank Of Montreal (BMO)
• Bank of Nova Scotia (BNS)
• Canadian Imperial Bank of Commerce (CM)
• Toronto Dominion Bank (TD)