Rising interest rates lend Canadian banks greater allure

Higher borrowing costs create a favourable environment for financial institutions.

Vikram Barhat 1 February, 2018 | 6:00PM

Barely three weeks into 2018, the Bank of Canada has already increased the benchmark rate by a quarter-percentage-point, or 25 basis points, to 1.25% in January. It was a stream of upbeat news and numbers around Canada's economy, robust job gains and steadily falling unemployment that prompted the central bank to proceed with the third rate hike since last July.

As the overnight rate continues to march toward more normal levels, it's the first time it has edged above 1% since 2009. So confident were leading Canadian banks that they raised their interest rates on a variety of rate-tethered products, including mortgages, days before the expected central bank rate hike.

While rising rates typically sound a cautionary bell for borrowers and consumers, they create a favourable environment for financial institutions where strong economic indicators and expectation of improved profitability conspire to create a growth tailwind for the sector. For dividend-seeking investors, this warrants a closer attention to leading Canadian lenders, which collectively hold 90% of the nation's banking deposits.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal90.19 CAD-3.55
Canadian Imperial Bank of Commerce101.66 CAD-2.94
Royal Bank of Canada98.99 CAD-3.44
The Toronto-Dominion Bank68.17 CAD-3.85

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a freelance writer.