The Bank of Canada raised its benchmark interest rates by 0.25% on March 2, 2022. This was the first-rate hike since 2018 and just the beginning of a few more rate increases expected this year alone.
In the midst of the pandemic, the central bank slashed its interest rates to 0.25% to help the Canadian economy weather the economic shock. So, why raise interest rates now?
The Bank of Canada is raising rates to curb soaring inflation as the Canadian economy shows signs of solid growth. In February 2022, the Consumer Price Index (CPI), an official measure of consumer inflation, was up 5.7% year-over-year. This is the biggest gain since August 1991. Since late 2021, the inflation rate in Canada has been growing at a very fast pace. Generally, the Bank of Canada targets for inflation to increase two to three percent annually.
As interest rates rise in Canada, this provides great opportunities for investors. While not all sectors benefit from higher interest rates, the financial sector does. This includes institutions like banks, insurance companies, and finance companies
Canadian Banks’ Profits Poised for Growth as Interest Rates Rise
Investors looking for opportunities could profit by investing in Canadian banks and other financial institutions. Financial institutions are very sensitive to interest rates. In a rising rate environment, banks can charge higher interest rates on loans, which boosts profit margins and ultimately leads to higher stock prices.
Canada is also a large producer of many commodities, such as precious and base metals, timber and forestry products, and crude oil. Recently, commodities prices have seen an uptick. Canadian banks usually have exposure to Canadian commodities producers as well. With higher commodities prices, producers could be looking to expand and borrow more. This could be another factor that boosts Canadian financial companies.
Investing in Canadian Financials
In recent years, Canadian banks have reported higher profits and strong balance sheets—with superior loan quality, and increased deposit activity. With rising rates and higher commodities prices, it’s possible Canadian financials could look a lot better going forward.
It’s also worth noting that Canadian financials have been known to keep shareholders happy. Banks have a very long history of providing dividends through thick or thin. For instance, Bank of Montreal (TSX:BMO) has the longest-running dividend-paying history. It has paid dividends since the early 1800s, and usually pays out 40% to 50% of its earnings in dividends to its shareholders over time.
In fact, when it comes to giving dividends, Canadian banks have done extremely well compared to peers in the U.S. or in the Eurozone in the recent economic and financial crises.
Looking for Higher Yield in the Banking Sector?
The Evolve Canadian Banks and Lifecos Enhanced Yield Index Fund (BANK ETF) provides investors with an enhanced yield from exposure to Canada’s largest banks and insurance companies through a covered call strategy applied on up to 33% of the portfolio and 25% maximum leverage. Covered call options have the potential to provide extra income and help hedge long stock positions. To learn more about this fund, please visit https://evolveetfs.com/bank/.
Hungry for yield in the finance sector? We’ve set the table with ETFs targeting 7% yield, utilizing active covered call strategies in U.S. banks and European banks: Evolve U.S. Banks Enhanced Yield Fund (CALL ETF) invests in U.S. large-cap and regional banks, while the Evolve European Banks Enhanced Yield ETF (EBNK ETF) invests in leading European banks. If you’re considering investing in this sector, click here to learn more.
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