TORONTO (Reuters) – Competition for deposits among Canada’s biggest banks is heating up for the first time since the global financial crisis, leading to higher funding costs that could crimp profit growth in their domestic businesses over the next two years, analysts say.

The emerging price war adds to risks clouding the outlook and will be a key focus as banks prepare to report quarterly earnings next week. Headwinds include a slowing housing market and record household debt, which threaten to end three years of record profits.

Profit margins are also being squeezed by a flattening yield curve in Canada, which hampers banks’ ability to borrow at a low rate and charge customers a higher one, analysts say.

“I think there is some short-term pain for the large Canadian banks,” said Robert Colangelo, senior vice president of the Financial Institutions Group at DBRS.

Over the past decade, Canadian banks have paid next to nothing on checking accounts and relatively modest rates on savings accounts. But Eight Capital banking analyst Steve Theriault says that pattern is changing as savers demand more following five Bank of Canada rate hikes since last summer.

Rates currently being offered on savings accounts are about twice what they were three years ago.

“It’s the first time you’re seeing heated competition since the financial crisis,” Theriault said.

Funding costs for the country’s biggest seven banks – Royal Bank of Canada, TD, Scotiabank, Bank of Montreal, CIBC, National Bank of Canada and Desjardins Group [FEDES.UL] – rose an average of 49 basis points during the third quarter of 2018 from a year ago, Fitch Ratings said in a report this month.

Net interest margins (NIMs), the difference between the interest they get from borrowers and what they pay to savers, were flat to slightly negative in the same period.

“We think margin expansion is going to start slowing,” said Chris Wolfe, head of North American banks research for Fitch.

RBC analysts lowered their estimates for Canadian banks’ earnings in the fourth quarter, citing a decline in revenue and loan growth, and forecast “flat to lower” NIMs going forward.

The banks declined to comment ahead of reporting their results next week.

CHEAPER FUNDS

Retail deposits are still a cheaper funding source for Canadian banks than wholesale markets, where banks have been reducing their borrowing in recent years.

Customer deposits accounted for 65 percent of Canadian banks’ funding at the end of 2017, compared with 62 percent three years earlier, credit ratings agency Moody’s said in March.

Scotiabank was the most reliant on wholesale funding last year, followed by CIBC. TD, which has vast retail operations in Canada and the United States, was the least reliant on the wholesale market, Moody’s said.

Scotiabank, which wants to increase its proportion of funding coming from deposits, is marketing a short-term offer of 3.2 percent annual interest on its main savings account. Other banks, including RBC and CIBC, are offering 3 percent.

At the same time, the yield on the five-year Government of Canada bond, which influences the interest rates banks can offer, has risen to 2.28 percent from 0.5 percent in February 2016.

RBC, Canada’s biggest lender, paid an average rate of 1.12 percent on its Canadian deposits in 2017, compared with 0.97 percent in 2016, its latest annual report showed. In contrast, Bank of America Corp’s 2017 annual report showed it paid 0.18 percent on interest-bearing deposits.

Shares in Canada’s banking stocks have fallen by 7.4 percent since the start of the year, broadly in line with the overall markets.

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