By Nichola Saminather
TORONTO (Reuters) - Canada's biggest banks said on Monday they would reduce their prime rates by 50 basis points to 2.95%, the lowest level since August 2017, fully passing on to borrowers the Bank of Canada's second interest rate cut this month.
Royal Bank of Canada, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce and Toronto-Dominion Bank said the change would take effect on Tuesday. National Bank of Canada's reduction will be effective from Wednesday.
The resulting shrinking of margins is set to combine with a potential recession to create a bleaker-than-expected year for Canadian lenders, investors and analysts said.
Credit Suisse (SIX:CSGN) analyst Mike Rizvanovic forecast on Monday an earnings decline for most Canadian banks, with "very modest growth" resuming in 2021, and flagging "material uncertainty" around near-term earnings.
The Bank of Canada lowered its benchmark rate on Friday, following a half-point cut earlier this month to protect against the economic impact of the coronavirus outbreak. The U.S. Federal Reserve slashed its borrowing rate to near zero on Sunday.
"The rate cuts are damage control, but it's going to be too little, too late," said Brian Madden, portfolio manager at Goodreid Investment Counsel, who now expects earnings declines for banks this year from low-single-digit growth earlier.
"The modern economy is run on confidence and credit ... if we each tighten the belt 1% or 2%, when the economy is only growing at 1% or 2%, you have a recession," Madden said.
The death toll in Canada from the virus jumped to four on Monday from one on Sunday. The number of infected stood at 407. The country on Monday closed its borders to all foreign nationals except U.S. citizens and permanent residents to slow the spread of the virus.
The Canadian banks index closed down 9.7% on Monday, broadly in line with the Toronto stock benchmark.
TD, which has a separate mortgage prime rate, will also cut that rate by 50 basis points to 3.10%, a spokeswoman said.
During the Bank of Canada's prior rate cuts, in January and July 2015, the banks passed on only 30 basis points each of the 50-basis-point cuts, but matched the central bank's three quarter-percentage-point increases in 2018.
Canada's financial regulator also said on Friday it would reduce to a record low the amount of capital that lenders must hold to protect against risks to boost lending capacity.
While banks could benefit from higher trading fees because of the volatility in markets resulting from fears about the pandemic, other areas, such as wealth management, would be hurt by the decline in consumer confidence, said Allan Small, senior investment adviser at Allan Small Financial Group with HollisWealth.
"Banks are the bloodline for the economy," Small said. "If the economy is slowing, banks are going to slow."