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RBC Touts Lower Loan Rates To Combat Lending Slump

Royal Bank of Canada, the country’s largest lender, is starting a nationwide marketing campaign touting lower home-equity loan rates than most rivals to gain customers as it combats a slowdown in Canadian consumer lending.

The Toronto-based firm is putting its home-equity message on about 270 billboards in Ontario, the most populous province, and in more than 85 newspapers and on 50 radio stations across Canada.

“We’re attacking, aggressively,” David McKay, group head of Canadian banking, said June 9 in an interview at Bloomberg’s Toronto office. “Now is the time to attack on price, because that’s a big differential to the customer.”

Shrinking margins are eroding operating results of Canadian banks, which may mean weaker-than-expected performance this year, Standard & Poor’s said in a June 10 note. Retail loan demand is slowing as households continue to pay down debt, which was at a near record 146% of disposable income in the fourth quarter, according to data compiled by Statistics Canada. The U.S. household debt level was 147%, according to the Federal Reserve and the Bureau of Economic Analysis.

“We have observed that the banks are ratcheting up competition in the pricing of retail (particularly mortgages) and commercial-loan products and paying up on deposits to strengthen their market share positions,” Lidia Parfeniuk, an S&P credit analyst, wrote in the note.

Royal Bank is offering home-equity loans at prime-plus-0.5%, lower than the prime-plus-1% rate of most other Canadian lenders, McKay said. The lower rate is due to a price “mismatch” left from 2009 when Royal Bank raised the rate on the loans for new customers by less than other lenders, he said.

Bank of Montreal is the only lender among Canada’s six- biggest banks with the same home-equity rate as Royal Bank’s. Toronto-Dominion Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce and National Bank of Canada have a rate of prime-plus-1%, according to spokesmen. The prime rate at the Canadian banks is 3%.

“If you’ve got a pricing inequity in the marketplace, that’s great,” McKay said. “And if you can do it and increase your margins, you’re in a very good place.”

Royal Bank has benefited from a higher net interest margin in Canada, the difference between what the bank charges for loans and pays in deposits. The margin rose to 2.78% from 2.76% a year earlier during the fiscal second quarter, the only Canadian bank to report higher domestic margins.

The lender has offset lower margins on mortgages with higher margins from deposits, savings and guaranteed investment certificates, McKay said.

Canadian banking is Royal Bank’s largest unit, generating about 58% of profit in the year ended Oct. 31. Earnings from Canadian consumer lending in the second quarter rose 16% to C$851 million ($871 million) from the year-earlier period as mortgages, personal loans and credit-card balances expanded and loan-loss provisions fell.

Royal Bank will continue adding branches, aiming for 15 to 25 a year in Ontario, Saskatchewan, Alberta and other high- growth areas across Canada, McKay said. The lender had 1,212 offices in the country at the end of April, more than any other domestic bank.

Bloomberg.com