Due to rising inflation, central banks in Canada and the U.S. introduced a series of key interest rate hikes in 2022 to control it. It has been 18 months since interest rate hikes began. After pausing for five months, however, the Bank of Canada (BoC) has increased key interest rates once more.
While higher interest rates cool inflation by slowing economic activity down, it is a double-edged sword leading to a potential bear market. When interest rates are high, borrowing costs increase across the board. For the consumer, living expenses increase.
For businesses, their interest expenses soar amid high-interest-rate environments. This results in weakness in the broader market, indicated by the 4.62% decline in the S&P/TSX Composite Index from its 52-week high.
Fortunately, not all TSX stocks operate the same way. For a few names listed on the TSX among Canadian bank stocks, higher interest rates can be beneficial. Today, I will discuss two such bank stocks to consider adding to your portfolio to leverage higher interest rates.
Royal Bank of Canada
Royal Bank of Canada (TSX: RY) is one of the largest banks in Canada and the largest TSX stock by market capitalization. The $174.40 billion market capitalization financial services company headquartered in Toronto serves over 17 million clients worldwide, offering personal and commercial banking, wealth management, insurance, capital markets, and corporate banking services.
Its internationally diversified business lets RBC leverage opportunities created by economic conditions. RBC stock is a long-standing giant in the Canadian financial services sector. While it is a cyclical stock impacted by market downturns, RBC has a wide enough economic moat to weather the storm and come out stronger on the other side. This fact is reflected by its market-beating runs for at least two decades.
As of this writing, Royal Bank of Canada stock trades for $125.84 per share, boasting a 4.29% dividend yield. It can be an excellent time to buy its shares while down by 10.23% from 52-week highs.
National Bank of Canada
National Bank of Canada (TSX: NA) is a name that finds its way among the Big Six Canadian banks. The Montreal-based $32.95 billion market capitalization stock does not even come close to RBC and its peers. That said, it has proven itself to be an excellent investment. In the last two decades, National Bank stock has returned over 1,000% to investors, outpacing the broader market.
The sixth-largest Canadian bank does not have internationally diversified operations. Instead, it focuses primarily on clients in Quebec and the city of Toronto. Offering personal and commercial banking, wealth management, and financial markets services, National Bank of Canada has substantial provisions for credit losses (PCLs) to combat the impact of an economic downturn.
Besides its PCLs, the bank has solid liquidity positions and capital to comfortably navigate the rough waters ahead. As of this writing, National Bank of Canada stock trades for $98.23 per share, boasting a 4.15% dividend yield.
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Foolish takeaway
With wider profit margins, TSX bank stocks can thrive in higher-interest-rate environments. For shareholders, this can be a good thing. Improving financial performance due to better profit margins can allow bank stocks to increase shareholder value and deliver stellar returns.
If I were to choose between the two, I would invest in Royal Bank of Canada stock. As the top TSX stock in market capitalization, it is a blue-chip stock that has established itself as a safe bet for long-term investors.
