on an upward trend, and a leading multinational bank is expecting higher interest rates to bring “palpable” relief for the firms, after years of facing net interest margin compression. “Even if the earnings impact is not immediate, we anticipate that, at a minimum, valuations will benefit when the rate hikes start,” A Barclay’s report released Wednesday read, adding that the analysts upgraded their price targets for the banks.
As part of its efforts to combat high inflation, the Bank of Canada is widely expected to begin rising rates this months. Meanwhile, bond yields have already started moving up, with the benchmark five-year and 10-year bond yields pushing higher since the New Year.
According to John Aiken, head of research and senior analyst at Barclays, such a re-pricing would have less of an effect on the bank’s borrowing business in comparison with the lending business. He pointed to an example where the returns on his checking account have not improved significantly over the past few years in a low-interest-rate environment, and a potential 0.25 per cent hike is not expected to change that either.
“However, my variable rate mortgage is going to is going to increase, any incremental loans that I take out… is going to increase,” he told the Financial Post. “And that’s the dynamic that’s going to benefit the banks. It’s not going to be instantaneous, but it will provide some relief to the margin compression that has honestly been weighing on the bank’s top-line revenues for some time.”
