Canadian bank stocks have seen some positive movement in the last while. But it doesn’t seem as though Canadian bank stocks are out of the woods quite yet. Because of this, there are a few considerations investors will want to look into before buying Canadian bank stocks. So, let’s get into them and which of the Canadian banks might be the best buy right now.
Interest rates
Of course, interest rates are a big factor for Canadian bank stocks right now — in both a positive and negative light. Higher interest rates can lead to higher interest collected. However, it can also mean more defaults on loans.
What investors should consider then is the impact on borrowing costs. Higher interest rates typically lead to increased borrowing costs for consumers and businesses. This could lead to lower loan demand and affect profitability for banks.
What’s more, consider Canadian bank stocks and the net interest margin. This is a key measure of profitability for banks, representing the difference between the interest income generated by the bank, and the amount of interest paid out to its lenders. Rising interest rates will mean banks with stronger net interest margins will be better position to maintain profitability.
Diversification
Another key for Canadian banks will be how diversified they are. Banks with a more diversified revenue stream, such as fee-based income from wealth management, investment banking, and insurance services, are likely to be less vulnerable during this time.
What’s more, Canadian banks will certainly need to use that diversified revenue to maintain capitalization and liquidity. These help Canadian bank stocks weather this rough storm and the fluctuations from higher interest rates.
There’s a lot to consider. If Canadian banks are overexposed to the Canadian market, for instance, they can have a lack of diversification. That can lead to lower results — even if the banks are exposed to the United States, with higher interest rates as well. This is why there is one bank that blows the rest out of the water.
Royal Bank stock
Royal Bank of Canada (TSX:RY) has done perhaps the best of the Canadian bank stocks these days. And what’s more, it’s proven to have a steady stream of income that’s allowed it to perform well, even during the worst recessions we’ve seen.
Recently, Royal Bank stock demonstrated diversification from its wealth management and investment banking sectors, providing strong recurring revenue streams. Loan quality has remained strong, with a net interest margin of 1.59%.
Furthermore, there is a lot more growth coming for investors. The company’s steady profitability and capital have allowed it to invest in HSBC Canada. After acquiring the business, it will have even more high-income newcomers on its roster. That will allow the bank to see a surge in clients overall as well as more wealth management clients.
Overall, Royal Bank stock has proven to be the best performer among Canadian bank stocks. And over time, it’s done this again and again. So, I would certainly consider it a buy among the Canadian bank stocks right now.
