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TORONTO (Reuters) – Canada’s small financial institutions are waging a war for deposits, offering customers higher interest rates as they try to shore up funding, despite a drop in official interest rates to a decade-low.

While Canada’s biggest banks have a variety of funding sources including wholesale markets, smaller players are more dependant on sticky customer deposits and earnings, particularly as credit spreads widen due to the economic fallout of the coronavirus pandemic.

Larger banks can also access government liquidity support including security purchases, and have capital buffers they can draw down, both of which are limited for smaller institutions.

“The bigger banks are well-positioned to handle a financial downturn… so they don’t need to provide the best rates,” said Brandon Brot, principal at deposit broker GIC Wealth Management. Although most deposits of up to C$100,000 are government-backed, the big banks are perceived as safer, he added.

Existing clients have grown deposit sizes due to the higher rates, he said.

Last week, Vancity, Canada’s biggest credit union, introduced the 5-year Unity term deposit paying 3% interest, more than double its other offerings.

Home Capital Group (HCG.TO) subsidiary Oaken Financial, which funds loans by sister company Home Trust, has raised its rate to 2.95% for five-year guaranteed investment certificates (GICs), after initially dropping it after the first central bank rate cut.

It raised the rate to be among those institutions offering better rates, said Melonie Dixon, vice president for deposits at Home Trust.

p>Equitable Group’s (EQB.TO) EQ Bank pays 2.45% on three-month GICs, higher than some longer-term products. Equitable declined to comment.
That contrasts with current five-year GIC rates from 1.05% to 2.05% at Royal Bank of Canada (RY.TO), TD Bank (TD.TO), Bank of Montreal (BMO.TO), Bank of Nova Scotia (BNS.TO), Canadian Imperial Bank of Commerce (CM.TO) and National Bank of Canada (NA.TO).

Vancity, where retained earnings make up almost 98% of funding, introduced Unity following an increase in demand for loan deferrals and short-term lending, Chief Executive Tamara Vrooman told Reuters.

“There’s going to be a haircut on margins… but it’s not our first concern,” Vrooman said. In the first five days, Vancity had raised C$23.8 million of its C$200 million target.

Between 47% and 61% of the Big Six banks’ funding came from deposits at 2019 end, with much of the rest from markets, according to ratings agency Moody’s.

“To the extent that smaller financial institutions use (deposits) more than big banks for funding, they’re going to compete harder for them,” said Jeremy Kronick, associate research director at think tank C.D. Howe Institute.

Reporting By Nichola Saminather; Editing by Denny Thomas and Andrea Ricci