Smaller Lenders Look to Narrow Gap with Big Six, Report Finds

Why It Matters

The shift toward fee income reshapes profitability for smaller banks and could diversify Canada’s banking landscape, while EQ’s PC Financial deal may create a credible challenger to the entrenched Big Six.

Key Takeaways

• Smaller lenders earn ~25% fees, Big Six about 50%.
• EQ Bank targets card and deposit growth through PC Financial purchase.
• Ottawa budget cuts fees, eases account switching to boost competition.
• Credit unions remain sole banks in many remote and First Nations areas.
• Analysts split: EQ’s deal could drive growth but raises credit risk.

Pulse Analysis

The Canadian banking sector has long been dominated by the six largest institutions, which together capture roughly three‑quarters of mortgage originations and half of total non‑interest revenue. A new Morningstar DBRS study shows that smaller banks and credit unions are deliberately pivoting to fee‑based services—wealth management, insurance, and credit cards—to offset pressure on net interest margins as housing sales soften. Over the past five years, these lenders have lifted fee income to about a quarter of their earnings, a clear attempt to build more resilient, diversified profit streams.

EQ Bank, the country’s seventh‑largest bank, is betting on a rapid transformation. In December it announced a “transformational” purchase of PC Financial’s Mastercard portfolio and PC Money accounts, a move that will embed the yellow‑branded bank into thousands of Loblaw grocery locations and ATMs. The deal is intended to fuel card issuance and deposit growth, while the bank seeks a partner to add wealth‑management capabilities it currently lacks. Analysts are divided: BMO’s Étienne Ricard lifted EQ’s target to C$130 (≈US$95) from C$108 (≈US$79), citing cross‑sell upside, whereas Scotiabank’s Mike Rizvanovic warns the acquisition could heighten credit‑loss risk amid rising loan delinquencies.

Regulators are also nudging the market. Ottawa’s latest budget proposes lower banking fees and streamlined procedures for moving chequing accounts, measures designed to lower switching costs for consumers and give smaller players a foothold. The government is pushing for open‑banking frameworks and lighter capital rules that could level the playing field with the Big Six. If these policy levers take effect, they may accelerate the fee‑income shift and enable institutions like EQ Bank to challenge the status quo, though the entrenched mortgage dominance of the major banks is likely to persist in the near term.