Canadian Banks Rely on U.S. Jobs

There’s no doubt Canada relies on the U.S. for its economic success. Lately Canadian governments at all levels have been working to decrease this dependence, but the fact is the U.S. remains a significant influence on Canada’s economic growth and prosperity.

We learned last week the U.S., for the first time since 1945, had zero jobs created in its economy in August. I guess if you’re a glass half full kind of person, you could say zero jobs destroyed. But it’s far off from the 93,000 jobs economists were expecting to be added to the labour force.

It has prompted President Barack Obama to make an emergency speech to Congress about his plan to create jobs and help the more than 14 million unemployed Americans get back to work. It’s called the “American Jobs Act,” and here is why it won’t work.

It promises tax incentives for employers to hire out of work Americans and more taxation on America’s most wealthy. That is the crux of it.  Obama is again saying he thinks the rich should pay for the mess the U.S. is in right now. A very,  we all need to chip in when the chips are down, attitude.

In his speech to Congress, Obama seemed almost desperate to have the bill pass mentioning repeatedly “pass this bill now” as if members listening were confused as to why they had gathered there.

The problem is, if there was a silver bullet to save the U.S. economy, Obama would have fired it ages ago. And if the solution was that easy, the economy would have fixed itself two years ago when the U.S. government invoked QE1 and QE2. That money was supposed to help bailout companies and create jobs.

This is Obama’s last-ditch effort to do something to help the economy and create jobs and by extension save his own.

Canadian economists have been listening very carefully, there is evidence that our economy cannot survive another U.S. recession.

Even the big mighty banks are worried and this comes after the majority of them reported huge third quarter profits. From a year ago,  TD Bank profits up 23 per cent, CIBC up 26 per cent, Scotiabank and BMO  up 18 per cent. Even the baby of the bunch, National Bank of Canada,  reported a 15 per cent increase in profits. The only lager was Canada’s biggest bank RBC, but it was expected mostly because of its recent write down of its U.S. retail banking operations.

But Canadian banks are worried they can’t keep it up.

Banks depend on mortgages for profits and with interest rates at near historic lows those profits are dwindling. On top of that Canadians are in record debt and that means,  even at these low rates, they are less likely to take more loans.

Recently some banks were complaining that without a rate hike by the Bank of Canada they would be unable to make money. With the U.S. economy still sputtering there is no chance the Bank of Canada Governor Mark Carney, will raise rates and risk Canada’s economic future. There is even whispers, ever so slight, of a possible rate cut in Canada.

I have no sympathy for the banks. Even with RBC’s losses they made a whopping $4.56 billion in the last quarter. Canadians still remain out of work and in deep debt.  Many have been unemployed for more than 12 months. So banks worrying  about their billions of profits,  is not what concerns me.

Keep your eyes glued to what is happening in the U.S.  America is the spark that lights the engine and that spark is getting weaker.

Its not just job numbers, consumer confidence is lower both sides of the border, manufacturing is slowing and markets remain volatile. On top of that rates are expected to remain lower until at least 2012.

What does this mean for your mortgage rates? If you have a variable mortgage or line of credit it will not get more expensive to carry.

No doubt Banks can expect lower profits in Q4 and moving into 2012. That means they may lean on their retail customers to make more money via higher fees and charges for their customer service.

That is what concerns me.

Protect your pocket book, if your bank fees start to rise, demand cheaper service or change banks.  Remember the billions of profits banks made  when everyone else was struggling. Canadians need to take care of their home economics and pay down debt. That is the only way we can protect ourselves.

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2 thoughts on “Canadian Banks Rely on U.S. Jobs

  1. I agree with your analysis of Obama’s speech and jobs plan, and also that an economic downturn in the U.S. will hurt Canada. But I’m curious why you believe “with interest rates at near historic lows those profits are dwindling.” Since the banks make the bulk of their profits on the interest rate spread, I’m not sure how the low rates hurt them. There certainly doesn’t appear to be any evidence the low rates are hurting them, based on their record profits this year. Could you elaborate?

    Thanks!

  2. Sorry for my late reply. When interest rates are low the spread the banks can charge shrinks. Banks want the overnight lending rate to be at more normal levels ie: 4-5 per cent. With rates this low (1 per cent), there is more competition between the financial institutions and that drives the posted rate even lower (hence shrinking the spread, or profit, they are making). Mortgages are banks biggest business and they will do anything to get you and keep you as a customer and in this interest rate environment that means cutting their profits. Many banks attribute their higher profits to higher fees they are charging customers and even though its cheaper to borrow, the volume the mortgages has gone up making them some money. But in my opinion Canadians are stretched to their limit and are unlikely to borrow more. I hope this helps. ~Rubina

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