Smaller Canadian lenders are increasingly adopting strategies from the Big Six banks by expanding wealth management and insurance offerings, widening access to credit cards, and innovating deposit accounts. This shift aims to weather economic uncertainty and boost competition, according to a new report from Morningstar Inc.
The report highlights that over the past five years, these institutions have relied more on non-interest income to generate revenue. Jiani Wu, vice-president of Morningstar's North American Financial Institution Ratings and author of the report, noted, "There are a lot of uncertainties in the market. With all that complexity and the potential of rate changes, it makes it even more important to have a stable fee-based income."
Why Non-Interest Income Matters
Wu explained that a soft real estate market could slow borrowing or make consumers "very picky" when choosing mortgage providers, negatively impacting net interest income. Increasing reliance on other income sources can make firms more robust and resilient. However, a significant gap remains between Canada's largest banks and smaller financial institutions.
Current Revenue Breakdown
Nearly half of the revenue generated by the Big Six banks comes from non-interest income, compared with about 25% for credit unions and 18% for mid-sized banks. The report analyzed six credit unions and three mid-tier lenders, including Laurentian Bank of Canada, EQB Inc., and Fairstone Bank of Canada.
Executives of smaller banks want to offer a "complete suite of products," including wealth management and mortgage lending, to retain customers who prefer having all banking services at one firm. This gives consumers more choices, especially in remote or underserved areas where banking products are limited.
Impact on Underserved Communities
Wu emphasized that for some First Nations, credit unions may be the only option, so providing more products and choices is extremely helpful. Despite growing competition, the Big Six banks' market dominance will not be materially affected. They control about 73% of the country's mortgages, according to Morningstar.
Ottawa is also boosting competition in the financial sector. The federal budget introduced measures to cut fees and simplify switching chequing accounts to encourage growth of alternative financial institutions outside the Big Six banks.
