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Banking on Rising Rates: Canadian Financial Stocks to Consider

edit Four girl friends withdrawing money from credit card at ATM
Image source: Getty Images

Written by Chris MacDonald at The Motley Fool Canada

Rising interest rates can be good for financial stocks. After all, a steepening yield curve and higher term premium benefit banks, which earn their profits via what’s known as net interest margin, or the difference between the rate they borrow money and the rate they lend capital out at. Thus, this current environment we’re in should be good for banks of all kinds around the world.

However, it’s not that simple. A steepening bear market could indicate a recession may be around the corner, which would inherently be bad for big banks. What we saw in 2008, or something potentially worse, could drive valuations much lower in this sector.

So, what should investors do? After all, many top banks are trading at reasonable valuations right now.

Here are two Canadian financial stocks I think are worth considering, given their risk/reward profile right now.

Royal Bank of Canada

Royal Bank of Canada (TSX:RY) is among the best-known Canadian banks – and companies – in the world. That’s partly due to the fact that Royal Bank is the largest cap Canadian stock, and has continued to be for a very long time (only surpassed from time to time by tech behemoths here and there).

Royal Bank’s international presence and impressive diversification have led to strong earnings of late. Rising interest rates have helped the lender strengthen its balance sheet and improve its liquidity, offsetting higher borrowing costs. In Q3 2023, RBC reported net income of US$3.9 billion, which is 8% or $295 million higher than the same quarter last year.

RBC’s diluted earnings per share (EPS) also reached US$2.73, indicating 9% growth. Furthermore, the bank had a 14.6% increase in its return on investment. These are the kinds of numbers long-term investors want to see, and until RBC stops producing such metrics, this is a stock to hold onto for the long-term, in my view.

Toronto-Dominion Bank

Toronto-Dominion Bank (TSX:TD) is probably the second most well-known Canadian bank worth discussing. TD is a major player in the U.S. retail banking space. Its Schwab business provides investors with excellent exposure to trading revenues as well.

Additionally, TD has been awarded the title of North America’s Best Consumer Digital Bank for the third consecutive year. It has also launched a new accessibility tool, which can help individuals personalize their online banking experience. It includes dyslexia-friendly font, dark mode, adjustable font size, and more.

I’ve looked at TD as one of the best Canadian bank stocks to buy for a long time, mostly due to the company’s historical track record of returning capital to shareholders. This remains the case, and I think the recent dip in TD stock is one worth exploring for a potential investment for those with excess capital to put to work right now.

The post Banking on Rising Rates: Canadian Financial Stocks to Consider appeared first on The Motley Fool Canada.

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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.