The ability to profit from higher interest rates is becoming a crucial differentiator among Canada’s big banks, with most other parts of their businesses poised to weaken as the economy slows.

Three of the country’s six largest banks beat earnings estimates in the fiscal fourth quarter, with only one of them managing to do so without the benefit of widening net interest margins. Of the three lenders that missed analysts’ projections, two suffered from contracting margins -- the difference between what banks earn on loans and what they pays for deposits.


Canadian banks’ net interest margins had suffered for years as central banks kept rates low to keep economies growing. That trend made the companies’ fee-based businesses such as capital markets and wealth management increasingly important. But central banks’ rapid rate-hike campaigns this year have flipped the dynamic and made the profitability of banks’ core, old-fashioned lending businesses key.

“Margins are important right now because fees are coming down and provisions are going up,” Paul Gulberg, an analyst at Bloomberg Intelligence, said in an interview. “The only thing that’s going to keep your earnings up is interest income, so you do want a higher margin.”

Toronto-Dominion Bank, which has a large retail-banking presence in both Canada and the US, is making the most of rising interest rates. The bank reported Thursday that its net interest margin expanded to 1.81 per cent in the three months through October, up 7 basis points from the previous quarter.   

Toronto-Dominion’s large base of low-cost customer deposits is providing the bank with cheap funding at the same time that rising interest rates are letting it charge more for loans. The trend lifted net interest income 22 per cent to $7.63 billion last quarter, with future rate increases poised to keep fueling earnings.

Net income rose 76 per cent to $6.67 billion, or $3.62 a share. Excluding some items, profit was $2.18 a share, beat analysts’ average estimate of $2.06.


Royal Bank of Canada on Wednesday also reported profit that topped analysts’ estimates, helped by widening net interest margins. National Bank of Canada was the only bank that missed analysts’ estimates while also reporting an expanding margin, as it was hampered by outsize exposure to the capital-markets business. The Montreal-based lender gets the highest proportion of revenue from capital markets among any of Canada’s Big Six.

By contrast, Canadian Imperial Bank of Commerce and Bank of Montreal both missed analysts’ estimates, hurt in part by narrower margins.

At CIBC, the measure contracted 10 basis points to 1.33 per cent in the fourth quarter from the previous three months, the Toronto-based company reported Thursday. Net income fell 18 per cent from a year earlier to $1.19 billion, or $1.26 a share. Excluding some items, profit was $1.39 a share, less than the $1.72 analysts estimated.


While, Bank of Montreal’s net interest margin widened 2 basis points from the previous quarter to 1.72 per cent on an adjusted basis, its reported margin shrunk 25 basis points to 1.46 per cent, the Toronto-based lender said Thursday. And the company’s Canadian personal and commercial banking business saw the measure contract 6 basis points to 2.66 per cent. Excluding some items, profit was $3.04 a share, less than the $3.07 analysts estimated.

“Despite the miss, there were some positives in BMO’s results,” Barclays Plc analyst John Aiken said in a note to clients. “The contraction in domestic retail margins are disappointing but the strong growth in loan volumes on both sides of the border are encouraging.”