1/ Lower rates = bigger market. More folks can afford loans when monthly payments drop. Simple math: same house, lower payment = more potential borrowers.

2/ Quality boost: When rates fall, existing borrowers breathe easier. Their debt payments shrink relative to income. Default risk ⬇️

3/ The fixed-income goldmine: Banks holding long-duration bonds saw their value surge as rates dropped. Free money.

4/ Balance sheet party: Lower rates = cheaper funding = banks could expand assets aggressively while maintaining margins.

🔑 Here’s the worry: This 40-year tailwind is now a headwind. Rising rates could force a fundamental rethink of banking business models.

Banks that can’t adapt their revenue mix to this new reality might be in for a rough decade.

What do you think? Are we headed for a significant restructuring of banking business models?

This Thomson Reuters Canada Bank Index and the S&P TSX 300 RATIO from 1990 to 2024 indicate potential weakness in the Canadian banking sector.

Here’s what’s particularly notable:

1. There’s a long-term uptrend line (shown in green) that held from around 2000 until very recently

2. In late 2024, there appears to be a significant breakdown below this long-term trend line, which could indicate:
– A structural change in how Canadian banks are being valued relative to the broader market
– Potentially increasing concerns about the banking sector’s health
– A shift in investor sentiment away from Canadian banks

3. The ratio peaked around January 2022, suggesting that Canadian banks have been underperforming the broader market since then

This breakdown of the long-term trend could be particularly significant because Canadian banks have historically been viewed as very stable institutions with strong regulatory oversight. A breakdown like this might suggest:
– Concerns about real estate exposure
– Impact of higher interest rates on loan portfolios
– Potential credit quality issues
– Changes in the competitive landscape