As anyone with a mortgage can attest, the cost to borrow money has gotten a lot more expensive this year. Banks were swift to pass on the rate hikes the Bank of Canada implemented as part of its aggressive campaign to tame inflation.
Variable rate home loans routinely top five per cent right now, more than twice what they were a year ago.
But the same can’t be said of savings accounts, which are not paying out much more today than they were a year ago, when the Bank of Canada’s lending rate was 0.25 per cent — its lowest level on record.
Canada’s five biggest banks offer a basic savings account with a rate paying between 0.01 and 0.035 per cent at the moment. So, if you are saving $1,000 for a year, you could earn a grand total of 10 to 35 cents in interest.
Even their so-called high-interest savings accounts that come with minimum balances and other stipulations all pay less than two per cent on an annualized basis.
CBC News reached out to Royal Bank, TD Bank, CIBC, Scotiabank and the Bank of Montreal this week, asking for an explanation as to why savings account rates seem to be slow to rise while lending rates do not, and all the responses were versions of a similar theme: that their rates are based on a variety of funding costs, and while rates on savings accounts are competitive, customers can often get higher rates with products such as GICs that lock in their money for a longer term.
Natasha Macmillan, director of everyday banking with rate comparison website Ratehub.ca, says consumers are keenly aware of that gap between what’s happening to the rates on what they owe versus what they have to save.
“As soon as the Bank of Canada raises their interest rate, we see that being translated immediately on the borrowing side,” she told CBC News in an interview. “But it does take a little bit slower for it to be translated to the high-interest saving side — not quite as quickly [and] not quite at the same rate.”
It didn’t used to be that way. While there’s almost always a gap between what banks charge to borrow money versus what they offer to savers, the spread is more in favour of the banks today than it’s ever been.
In 1981, when Canada’s inflation rate peaked at more than 12 per cent, savings accounts were paying out 19 per cent interest. As recently as 1990, inflation was roughly five per cent, and savings accounts were paying out almost twice that.
Here’s what rate hikes meant for Canadians — in 1979
In 1979, the Bank of Canada raised its benchmark rate to 11.25 per cent, just ahead of the inflation rate at the time. CBC reporter Fred Langan outlined what it would mean for Canadian borrowers and savers.
That’s not happening today, and there are a few reasons why, says Claire Celerier, a professor of finance at the Rotman School of Business at the University of Toronto.
The first one is that the banks have a lot of deposits on their balance sheet; in their quarterly earnings being released this week, the big banks reveal that they have hundreds of billions of dollars of consumer deposits on their books.
While banks are subject to higher borrowing costs themselves, customer deposits make up about two-thirds of their funding source. Right now, with plenty of deposits to satisfy their needs, they have very little incentive to try to convince people to give them more.
“They have deposits, so they are not stressed about having access to more funds,” said Celerier. “And the mortgage market is slowing down so they don’t need more funds to fund more mortgages.”
Finance professor Claire Celerier says Canadians are on the whole very loyal to their banks, which is a profitable arrangement for the lenders. (Dean Gariepy/CBC)
But the biggest reason why savings account rates aren’t going up as fast or as high as many savers would like boils down to consumer complacency — or what economists like Celerier call the “stickiness” of the market: a reluctance to leave.
Canada’s five biggest banks control the vast majority of banking services in Canada, and while the stability of Canada’s banking sector is often lauded, at the consumer level a relative lack of competition has its downsides.
Most Canadians prefer to keep their money in a bank they know and trust and that offers them other services, so many don’t bother shopping around for higher interest rates, she says. “That has some costs, directly paid by the consumers, which is that mortgage rates might be higher than in other markets, and the rates on deposit accounts might be relatively lower.”
Lack of choices
CBC News witnessed that consumer apathy the streets of Toronto this week, asking Canadians for their take on their humble savings accounts.
“I haven’t really ever thought about it, I’ve just assumed that’s the way that it is,” Kumbo Mwanangonze said of the meagre rate he gets on his savings account. “I’ve never really looked at my savings account as a way to generate additional money.
“I don’t think that it’s fair if you stop to think about it, but the reality is that I don’t stop to think about it — the amount of interest that you could possibly generate from a savings account, I just don’t think it’s enough to even worry about.”
Like many of the people CBC News asked about their savings accounts, Kumbo Mwanangonze said he hadn’t thought much about the low rate he was getting in interest. (CBC)
While he didn’t think it seemed fair for banks to keep savings account rates low even as they raise borrowing rates, Josh Chan says consumers like him deserve some of the blame for being complacent, but ultimately “there’s not enough competition for just savings in general. I think it’s not a monopoly but there’s definitely … just not enough choices.”
Jennie Darnley used to work at one of the big banks, a job that she says gave her a front row seat at how good they are at making it hard for customers to switch. “They make it really challenging, which it’s kind of crazy,” she said. “You’re supposed to invest your most precious assets in these banks and trust them, but I don’t really know if they have people’s best interests in mind.”
It may be inconvenient, but MacMillan with Ratehub.ca says it pays to shop around. She says there are high interest savings accounts at credit unions and online-only banks paying out two, three and even four per cent with few strings attached, in some cases, but you have to be willing to hunt for them.
“We definitely recommend people shop around and switch over to … new accounts as they find better rates,” she said. “Some of the [smaller] banks or the credit unions that can offer those better rates than we’re seeing at the big banks.”
Ultimately, Celerier says the onus is on consumers to seek out better deals where they can, because the status quo is just fine for the banks. “Banks are making profits by not passing on the higher interest rates,” she said.
“When the level of interest rates at a savings account is lower than inflation, people are losing money and savings are basically melting away,” she said. “Real returns on savings are negative.”
MONTREAL – Travel company Transat AT Inc. reported a loss in its latest quarter compared with a profit a year earlier as its revenue edged lower.
The parent company of Air Transat says it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31.
The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue in what was the company’s third quarter totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
Transat chief executive Annick Guérard says demand for leisure travel remains healthy, as evidenced by higher traffic, but consumers are increasingly price conscious given the current economic uncertainty.
This report by The Canadian Press was first published Sept. 12, 2024.
Dollarama Inc.’s food aisles may have expanded far beyond sweet treats or piles of gum by the checkout counter in recent years, but its chief executive maintains his company is “not in the grocery business,” even if it’s keeping an eye on the sector.
“It’s just one small part of our store,” Neil Rossy told analysts on a Wednesday call, where he was questioned about the company’s food merchandise and rivals playing in the same space.
“We will keep an eye on all retailers — like all retailers keep an eye on us — to make sure that we’re competitive and we understand what’s out there.”
Over the last decade and as consumers have more recently sought deals, Dollarama’s food merchandise has expanded to include bread and pantry staples like cereal, rice and pasta sold at prices on par or below supermarkets.
However, the competition in the discount segment of the market Dollarama operates in intensified recently when the country’s biggest grocery chain began piloting a new ultra-discount store.
The No Name stores being tested by Loblaw Cos. Ltd. in Windsor, St. Catharines and Brockville, Ont., are billed as 20 per cent cheaper than discount retail competitors including No Frills. The grocery giant is able to offer such cost savings by relying on a smaller store footprint, fewer chilled products and a hearty range of No Name merchandise.
Though Rossy brushed off notions that his company is a supermarket challenger, grocers aren’t off his radar.
“All retailers in Canada are realistic about the fact that everyone is everyone’s competition on any given item or category,” he said.
Rossy declined to reveal how much of the chain’s sales would overlap with Loblaw or the food category, arguing the vast variety of items Dollarama sells is its strength rather than its grocery products alone.
“What makes Dollarama Dollarama is a very wide assortment of different departments that somewhat represent the old five-and-dime local convenience store,” he said.
The breadth of Dollarama’s offerings helped carry the company to a second-quarter profit of $285.9 million, up from $245.8 million in the same quarter last year as its sales rose 7.4 per cent.
The retailer said Wednesday the profit amounted to $1.02 per diluted share for the 13-week period ended July 28, up from 86 cents per diluted share a year earlier.
The period the quarter covers includes the start of summer, when Rossy said the weather was “terrible.”
“The weather got slightly better towards the end of the summer and our sales certainly increased, but not enough to make up for the season’s horrible start,” he said.
Sales totalled $1.56 billion for the quarter, up from $1.46 billion in the same quarter last year.
Comparable store sales, a key metric for retailers, increased 4.7 per cent, while the average transaction was down2.2 per cent and traffic was up seven per cent, RBC analyst Irene Nattel pointed out.
She told investors in a note that the numbers reflect “solid demand as cautious consumers focus on core consumables and everyday essentials.”
Analysts have attributed such behaviour to interest rates that have been slow to drop and high prices of key consumer goods, which are weighing on household budgets.
To cope, many Canadians have spent more time seeking deals, trading down to more affordable brands and forgoing small luxuries they would treat themselves to in better economic times.
“When people feel squeezed, they tend to shy away from discretionary, focus on the basics,” Rossy said. “When people are feeling good about their wallet, they tend to be more lax about the basics and more willing to spend on discretionary.”
The current economic situation has drawn in not just the average Canadian looking to save a buck or two, but also wealthier consumers.
“When the entire economy is feeling slightly squeezed, we get more consumers who might not have to or want to shop at a Dollarama generally or who enjoy shopping at a Dollarama but have the luxury of not having to worry about the price in some other store that they happen to be standing in that has those goods,” Rossy said.
“Well, when times are tougher, they’ll consider the extra five minutes to go to the store next door.”
This report by The Canadian Press was first published Sept. 11, 2024.
TORONTO – The U.S. Consumer Financial Protection Bureau has ordered TD Bank Group to pay US$28 million for repeatedly sharing inaccurate, negative information about its customers to consumer reporting companies.
The agency says TD has to pay US$7.76 million in total to tens of thousands of victims of its illegal actions, along with a US$20 million civil penalty.
It says TD shared information that contained systemic errors about credit card and bank deposit accounts to consumer reporting companies, which can include credit reports as well as screening reports for tenants and employees and other background checks.
CFPB director Rohit Chopra says in a statement that TD threatened the consumer reports of customers with fraudulent information then “barely lifted a finger to fix it,” and that regulators will need to “focus major attention” on TD Bank to change its course.
TD says in a statement it self-identified these issues and proactively worked to improve its practices, and that it is committed to delivering on its responsibilities to its customers.
The bank also faces scrutiny in the U.S. over its anti-money laundering program where it expects to pay more than US$3 billion in monetary penalties to resolve.
This report by The Canadian Press was first published Sept. 11, 2024.
