The key interest rate has fallen. Canadians were thrilled this week to learn that the Bank of Canada made its first rate cut in over four years. This brought the interest rate down to 4.75% from 5%, and more are likely lining up for the summer.
This can be great news for Canadian banks. While higher interest rates mean the companies can charge more, it also means there is less investment and loans. Now, with more consumer confidence, these two Canadian banks are likely up to bat for an increase over the next few quarters.
CIBC stock
First up, Canadian Imperial Bank of Commerce (TSX:CM) is likely to see another pop in share price among bank stocks. Especially with a lower key interest rate. And this comes down to a variety of factors.
Lower interest rates typically lead to increased demand for mortgages as borrowing becomes cheaper. CIBC, as a major mortgage lender in Canada, stands to benefit from this increased demand. More homebuyers may seek mortgages, and existing homeowners may look to refinance their mortgages at lower rates. This can drive higher mortgage origination volumes for CIBC, boosting its interest income.
Yet, it’s not just mortgages. Lower interest rates often lead to higher demand for loans, including mortgages, personal loans, and business loans. As one of Canada’s major banks, CIBC stands to benefit from increased lending activity, which can generate additional interest income.
And that’s not all. Lower interest rates can make borrowing cheaper for consumers, leading to increased spending on goods and services. This can positively impact CIBC’s retail banking operations, including credit card usage and consumer loans.
So, while shares of CIBC stock are near 52-week highs, they still have room to run. As the company continues to perform well, it now has even more room to grow with lower interest rates.
BMO stock
Then there’s Bank of Montreal (TSX:BMO), which will likely finally see better performance in shares with a lower interest rate. And this mainly comes down to its purchase of the Bank of the West in the United States.
BMO’s expanded presence in the United States through the acquisition of Bank of the West provides diversification benefits for Canadian investors. While a cut in the key interest rate by the Bank of Canada may have specific implications for the Canadian market, BMO’s earnings from its U.S. operations could help mitigate any adverse effects. A diversified revenue base can help cushion the impact of domestic economic fluctuations.
Lower interest rates in Canada can stimulate consumer and business borrowing activity, leading to increased demand for loans. BMO, with its operations in both Canada and the United States, may benefit from increased lending activity in Canada while also potentially benefiting from similar trends in the U.S. market. Increased loan demand can boost interest income for the bank.
Altogether, BMO stock will have lower interest rates on loans to pay down its debts when it comes to Bank of the West. It’s now looking to create $1 billion in synergies through the purchase as well. As the United States recovers, the bank should see its earnings rise significantly. So, if you’re looking for the next two Canadian banks set to pop, I would keep an eye on CIBC stock and BMO stock for now.
