ALERT: Here’s Why I’m Buying Bank Stocks After the Rate Hike

The Bank of Canada (BoC) rate hike should spur investors to snag top bank stocks like Royal Bank of Canada (TSX:RY)(NYSE:RY) right now.

| More on:
warning or alert

Image source: Getty Images

On the morning of April 13, The Bank of Canada (BoC) moved to raise its key interest rate by 50 basis points to 1%. This represented the highest one-go rate increase in over two decades. Moreover, the BoC has warned that further interest rate hikes are on the way. Canadian investors should prepare accordingly. Today, I want to discuss why some of the top Canadian bank stocks could be a great investment in this climate. Let’s jump in.

Why the interest rate hike could give a boost to Canada’s top financial institutions

Back in November 2021, I’d discussed the prospects of rate tightening in the months ahead. At the time, policymakers were already telegraphing their intensions. Canada’s inflation rate has increased in the months that have followed, which has applied more pressure on the BoC governors.

In that article, I’d suggested that an exchange-traded fund (ETF) that focused on high-yield Canadian bank stocks was a solid hold. Indeed, rising interest rates should greatly bolster profitability for the top domestic financial institutions. Canadian household debt has ballooned over the past decade. Interest rate hikes mean that banks will be able to gobble up greater margins on the loans they have dished out.

The top Canadian bank stock looks like an attractive buy right now

Royal Bank (TSX:RY)(NYSE:RY) is the first bank stock I’d look to target in the middle of April. This is the top financial institution in Canada and one of the most influential around the world. Shares of Royal Bank have been mostly flat in 2022 as of close on April 14. The bank stock is still up 15% in the year-over-year period.

The bank unveiled its first-quarter 2022 earnings on February 24. Royal Bank reported double-digit residential mortgage growth in its Personal & Commercial Banking segment. It also delivered strong growth in retail and wholesale loans. Royal Bank’s extensive credit book should see a nice boost to its profit margins in response to rising rates.

Two more bank stocks to target in this environment

Back in September 2021, I’d looked at some of the top discounted bank stocks. Bank of Montreal (TSX:BMO)(NYSE:BMO) remains a very solid target for Canadians who are on the hunt for value in this space. Moreover, its credit book should also receive a boost due to the interest rate hike. This bank stock is up 1.5% so far this year.

Like its peers, Bank of Montreal benefited from stronger volume growth and a big dip in provisions set aside for credit losses. Shares of BMO currently possess a very solid price-to-earnings ratio of 11. It offers a quarterly dividend of $1.33 per share. That represents a 3.7% yield.

National Bank (TSX:NA) is the third bank stock I’d look to snag after the interest rate hike. This top Quebec-based bank often flies under the radar. Shares of this bank stock have dropped 5.1% so far in 2022.

In Q1 2022, National Bank delivered net income growth of 22% year over year to $932 million. Like its peers, this bank benefited from strong revenue growth. Total revenues jumped 9% on the back of improved loan and deposit results. That means National Bank is well suited to see a spike in profit margins after this rate hike.

This bank stock possesses a very attractive P/E ratio of 9.9. National Bank offers a quarterly dividend of $0.87 per share, representing a 3.7% yield.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Bank Stocks

Senior Couple Walking With Pet Bulldog In Countryside
Bank Stocks

A Different Bank for a Comfortable Retirement

Want a comfortable retirement? Investing in this different bank today can help you reach that goal through a solid income…

Read more »

thinking
Bank Stocks

Bank of Montreal (TSX:BMO) Raises Dividend: Is the Stock a Buy?

Bank of Montreal is about to get a lot bigger. Should you buy the stock?

Read more »

Bank Stocks

Bank of Nova Scotia (TSX:BNS) Hikes Dividend: Time to Buy the Stock?

Bank of Nova Scotia delivered strong fiscal Q2 2022 results. Is the stock undervalued?

Read more »

edit Sale sign, value, discount
Bank Stocks

2 Blue-Chip Bank Stocks Trading for a Discount Right Now

Value-seeking investors have an excellent opportunity to add these two blue-chip bank stocks to their portfolios for a discount.

Read more »

data analyze research
Bank Stocks

With a 6 Percent Yield, Time to Buy Cheap Shares of IGM Financial?

The wealth management company had record earnings, but the shares are trading at a one-year low.

Read more »

close-up photo of investor Warren Buffett
Bank Stocks

Warren Buffett’s #1 Rule in Investing: How Can Investors Apply it?

Warren Buffett's number one rule in investing is to never lose money. Here's what you can focus on to make…

Read more »

Bank sign on traditional europe building facade
Bank Stocks

3 Cheap Bank Stocks to Buy Ahead of Earnings

Canadians should look to snag undervalued bank stocks like National Bank of Canada (TSX:NA) and others in late May.

Read more »

stock data
Bank Stocks

Annoyed With Inflation? Then Buy These 2 Bank Stocks

Rising inflation is annoying, but if you want to counter it, choose quality assets like the two biggest bank stocks…

Read more »