Here’s how bank stocks might perform if the Bank of Canada starts hiking rates

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeFinanceBankingInvestorHere's how bank stocks might perform if the Bank of Canada starts hiking ratesSome analysts say the impact of a potential hike before year-end may be different this timeBank buildings in Toronto's Financial District. Photo by Wikimedia CommonsCanadian bank stocks did not perform well during previous Bank of Canada rate-hiking cycles, but some analysts say the impact of a potential hike before year-end may be different this time because Canada is looking to accelerate the growth of key sectors, such as energy and defence, and attract $1-trillion worth of investments.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe United States Federal Reserve increased its benchmark interest rate by a quarter of a percentage point to a range of 3.75 per cent to four per cent last week to try to curb inflation that has been rising amidst the war on Iran and the resulting disruption of energy supplies.The Bank of Canada held its key interest rate for the seventh consecutive time in early September, but it said the risks of higher and persistent inflation have increased because of the war. As such, the odds of a hike before year-end have increased.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try againA rise in interest rates can benefit banks by boosting their profit margins in the short term, but it could also slow down their loan growth and lead to higher credit losses as consumers find it difficult to pay back the loans at a higher interest rate.Bank stocks fell by 24 per cent on average during the past seven rate-hiking cycles since the early 1980s, before starting to go back up again, according to a Canadian Imperial Bank of Commerce analysis.“The average drawdown (peak to trough) across those seven time periods was 24 per cent for the Canadian banks, with a range of minus 14 per cent (2004-2006) to minus 35 per cent (1986-1989),” Paul Holden, an analyst at CIBC, said in a note on Sept. 16. “The average duration of the drawdown period is eight to nine months. The average drawdown for the TSX over those same time periods is 18 per cent and for the S&P 500 it’s 16 per cent.”Gabriel Dechaine, an analyst at National Bank of Canada, said in a note on Sunday that the negatives of a rate hike could outweigh the positives, but the conventional risk factors the banks would face need to be considered within the current context.For example, he said loan growth, which plays a key role in how banks make their profits, fell to seven per cent in 2023 and four per cent in 2024 from 14 per cent in 2022 once the Bank of Canada started raising rates.But considering that the federal government is advancing an economic strategy to build Canada’s natural resources sector and strategic industrial sectors, “a potential capex ‘super cycle’ may stimulate credit growth that defies conventional wisdom,” he said.Dechaine said loans related to consumers may be under pressure, but commercial and wholesale loan growth could easily accelerate.He also said that if the Canadian economy is “underpinned by ‘nation-building’ projects that spur capex investment on a multi-year basis, it is plausible that higher rates could simply maintain a plateau of higher-than-average credit losses, rather than cause a spike in loan losses.”This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.In such a situation, both analysts recommend prioritizing certain banks as opposed to relying on the sector overall.For example, Dechaine chose Toronto-Dominion Bank because it had better net-interest margins (NIMs) than the rest of the Big Six when rates started to increase in 2022.“Not only does the bank offer relatively stronger NIM upside in a rising rate environment, but it also has ample balance sheet capacity to support a potential surge in domestic credit demand,” he said.Holden said adding “weight to more defensive names,” specifically Royal Bank of Canada and TD, should be considered by investors.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. 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