“The banks want people to borrow more money. The ideal client [in a housing bubble] for the advisor is somebody who doesn’t borrow money, who has a modest house and saves a lot of money. This client is not interesting to the banks because they can’t make any money off them.”
“Where the banks make all their money, really 95 percent of profits, is from clients borrowing money for mortgages, HELOC’s, and credit cards.”
The banks are doing harm to their overall business by pushing growth in wealth management where the return on equity isn’t nearly as attractive as they are in lending. It’s a policy of pursuing growth for growth’s sake but at the expense of its overall returns for shareholders.
“They [RBC] could double their wealth management division and their profits wouldn’t even go up 5 percent. They’re trying to expand in an area where the ROE isn’t even 10 percent…There’s a fundamental mismatch between the two activities.”
It seems hard to imagine the big banks retreating from wealth management at this point. But then again, a 50 percent crash in Canadian housing prices also seems improbable.
Will the banks go back to lending exclusively? If MacBeth’s real estate call comes true, they might not have a choice.