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Winners and Losers After Bank of Canada Set Rates to 5.0%

Canadian media is questioning the wisdom of the Bank of Canada. It raised rates yet again by 25 bps. At 5.0%, depositors have little incentive to speculate with their cash. This creates winners and losers for Canadian financial institutions.

TD Bank (TD) and Royal Bank (RY) will likely report weakening trading commissions from stock trading volumes. They win out by earning higher net interest income, however. Still, investors will need to brace for rate cuts next year. This discourages depositors from adding funds, hurting the bank’s NII.

Weak mortgage demand from higher interest rates hurts the banks. In addition, Canada’s regulator is proposing changes on mortgages in negative amortization. Lenders need to hold more capital to align with the associated risks from negative amortization mortgages. Investors need to beware of banks with customers having mortgages with a loan-to-value ratio above 65%.

Losers from Rate Hike

While banks have wins and losses from the hike, resource firms are the biggest losers from the higher rates. The economy will surely slow from here. Demand for raw materials will slump. Watch out for firms like Lundin Mining, Barrick Gold, Teck Resources, and HudBay Minerals. Fertilizer demand may weaken, too. However, Nutrien (NTR) benefited from the port strike ending last week.