BMO chief executive Darryl White at the bank's main branch, in Montreal, on Oct. 29, 2017.Dario Ayala/For The Globe and Mail
Upheaval in Canada’s federal government is causing greater uncertainty for the country’s businesses just as the outlook is starting to appear clearer for their peers in the United States, according to Bank of Montreal BMO-T chief executive officer Darryl White.
During a conference hosted by Royal Bank of Canada RY-T, the CEOs of the country’s largest lenders set the stage for 2025 as a year marked by mounting global political uncertainty, rising mortgage competition and intensifying anti-money laundering requirements. In recent weeks, the unravelling of Prime Minister Justin Trudeau’s Liberal government has been added to the list of risks to watch at the banks.
Over the past year, U.S. clients have had to operate while unsure of the path of interest rates, the outcome of the presidential election and the effect a new leader would have on the fiscal and regulatory policy outlook. That prompted many U.S. businesses to hold off on deploying capital and launching growth plans, Mr. White said.
With president-elect Donald Trump set to take office in a few weeks and Mr. Trudeau’s resignation opening the door for an election, Canadian businesses are now faced with an increasingly unclear decision-making path.
“There’s a lot less uncertainty in the United States today than there was a year ago. Set aside the drama, there’s clearly a pro-growth agenda that people are signing up for,” Mr. White said.
“We’ve got our situation politically where we have uncertainty around who the leader of the incumbent Liberal Party will be and who the prime minister is going to be, and we’ll probably have an election in a few months to sort that out. But in the meantime, you’ve got a client base that says that’s a heck of a lot of uncertainty because I don’t know what the policy outlook is going to be on the planning horizon. So what do people do when they’re uncertain? They wait.”
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But Mr. Trump’s return to government also brings risks to the banks’ clients, with the incoming president threatening sweeping tariffs on Canada. RBC CEO Dave McKay said that the bank is preparing for a variety of outcomes, but broad tariffs would cause “economic damage” in both Canada and the U.S.
“It’s disappointing to hear the rhetoric intensify when we thought it was mitigating to an extent,” Mr. McKay said.
“We’re still trying to figure out the objective of that rhetoric. There is a lot of opportunity to work together to create better economies and better integration, and I don’t believe that tariffs achieve that. I think that tariffs can do a lot of damage.”
The banks are also facing mounting scrutiny over their defences against financial crime. Early last year, a U.S. banking regulator ordered RBC’s U.S.-based subsidiary City National Bank to implement reforms for gaps in many of its internal controls and risk-management processes.
In October, Toronto-Dominion Bank TD-T pleaded guilty to conspiracy to commit money-laundering, prompting a suite of severe penalties from U.S. regulators and law enforcement, including a US$3-billion fine.
TD chief operating officer Raymond Chun – who is set to take on the CEO job in the spring – said that the bank is assessing its strategic plan to identify growth opportunities while constrained by the regulatory asset cap that limits growth in its U.S. retail banking business.
While the bank is considering several options, including a sale of its 10.1-per-cent stake in U.S.-based Charles Schwab Corp., TD already sold 40.5 million shares in Schwab in August to raise funds to cover fines connected to the U.S. anti-money-laundering investigation, lowering its previous 12.3-per-cent stake.
“We are 100 per cent committed to our franchise in the United States,” Mr. Chun said.
Separately, TD has an agreement with Schwab to provide sweep deposit accounts – which automatically transfer uninvested cash in brokerage accounts to higher-interest products – to the U.S. financial institution’s clients. Mr. Chun said that the deposit agreement will remain in place regardless of what the bank does with the Schwab investment.
In Canada, the banks are preparing for heated competition in the mortgage market – which an RBC analyst referred to as a mortgage war – as more loans come up for renewal under higher interest rates.
Mr. Chun said TD has invested in its mortgage business, including in technology and data analytics, as well as a recently launched specialized model for mortgage and investment specialists in its branches.
“I look forward to an active season, but our goal is to make sure that we are growing profitably and continuing to take market share as we go forward,” Mr. Chun said.
Canada’s banking regulator has cautioned that the higher number of borrowers renewing under the strain of increased interest rates could cause defaults to increase. Office of the Superintendent of Financial Institutions head Peter Routledge said at the conference that delinquencies have been manageable, but the regulator is continuing to monitor risk as 2.4 million mortgages – or about half of all mortgages in Canada – have not been renewed since the onset of the COVID-19 pandemic.
Mr. Routledge said that the mortgage stress test – which requires uninsured borrowers to qualify at a rate of 5.25 per cent or two percentage points above their actual contracted rate – did not help the financial system avoid the large block of variable-rate mortgages coming up for renewal with sizable payment shocks. In November, OSFI implemented loan-to-income limits that require banks to limit the number of mortgages that exceed 4.5 times the borrower’s annual income, which is also known as a loan-to-income (LTI) ratio of 450 per cent.
Mr. Routledge said that Britain launched a similar program during the pandemic, and that it was a more effective measure than the mortgage stress test. As a result, Britain dropped its stress-test requirements.
“We’re going to test this flow limit over the next year or so, and if it works, it’ll either be a complement or an alternative to the minimum qualifying rate for uninsured mortgages,” Mr. Routledge said.
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