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During the first quarter of 2023, the Canadian economy performed well. A warmer than average winter and a strong labor market helped the economy recover from a lackluster Q4 2022.

Following the growth seen in GDP during both January and February, the country experienced an annualized growth rate of 2.5% in Q1. Despite the strong start to the year, the aggressive interest rate hiking by the Bank of Canada, in a deliberate attempt to slow the economy and reduce inflation, has been weighing on more recent economic performance. Its policy rate, which now stands at 4.5%, is the highest since the Global Financial Crisis (2008). The Bank of Canada has stated that it is now expecting to pause its rate hiking cycle whilst it allows for the economy to adjust to a higher rate environment. It has also stated however that getting inflation back to its 2% target remains a priority and make take longer than originally planned. The increase in rates has been having the desired impact and inflation has started to reduce. Inflation across the country currently stands close to 4% from a peak of more than 8% during June 2022.

Strong demand for material, energy and banking stocks has helped to generate strong securities finance returns for Canadian equities during Q1 2023. Revenues during Q1 totaled $107.8M (USD) which is a 42.8% increase YoY. This represents the best Q1 period since 2020 (Q1 2020 $162.9M). The specials market in Canada is also performing well when compared on a YoY basis. Specials activity to April 2023 generated $40.6M USD which is an increase of 47% YoY. These revenues were generated from approximately 28% of all on loan balances over the period. An increase in average fees to 69bps (+17% YoY) represents the highest average fee level since 2020 (Q1 2020 average fee 1.82%). Utilization has also remained significantly higher during every month of 2023 so far and now stands at a multi-year high. With strong utilization and a relatively high weighted fee, Canadian equities can expect to continue provide strong returns for lenders heading into H2.

In the fixed income markets, Canadian government bonds also continued to perform well. Revenues increased 9% over the quarter to $38.4M USD. Average fees remained at 15bps which is a 30% increase YoY. Despite these strong returns, utilization continued to fall over the quarter, this is a general trend across government bonds, hitting 18%, which is a multi-year low, in April.

Securities finance activity remains strong across the main asset classes in Canada. The specials market continues to add important revenues to lenders and higher average fees in the government bond markets will continue to provide opportunities for lenders heading into Q3 and H2.

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Specials are classed as a securities lending fee of greater than 500bps

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.