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Royal Bank of Canada (RY)
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Bank of Nova Scotia (The) (BNS)
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Canadian Western Bank (CWB)
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EQB Inc. (EQB)
The Canadian banking sector has been fairly muted for a while now, notwithstanding higher rates which have been beneficial in boosting interest income. And, soon, rates are expected to decrease. Is that going to hurt their earnings or help due to an overall smaller delinquency in loan repayments? If it will help, from a choice of buying and holding some of the smaller Canadian on-line only banks or the traditional ones, say for the next five years, which would you recommend?
Higher rates benefit the financial sector in that its net interest income rises on its earning assets base, however, higher rates also means that consumers are less likely to take on loans, and the capital markets might be dampened, causing BNS's non-interest income to decline.
Overall, we believe that interest rates declining will be a net benefit for bank stocks, as consumers take on higher loan balances and the capital markets are likely to improve. In addition, if rates decline, it is possible that the economic outlook can improve as consumers are more able to service debts, and thus, banks might reverse provision for credit losses that were estimated throughout 2023.
Over the next five years, if rates are to decline, we see both traditional and non-traditional bank stocks performing well, however, we could see the traditional names outperform non-traditional names as they have been suppressed more, they have high provision for credit losses, and consumers might take on more loans with the traditionally 'safe' banks, rather than the more non-traditional banks.