Gordon Pape: Who Stands to Gain From Rising Interest Rates?
Which companies benefit and which don’t?
Q – I need to better understand the impact of interest increases for banks and utilities. Yesterday, I heard an analyst saying that the drop in Canadian bank shares was due to anticipated interest increases. Today, I just saw news saying that JPMorgan profits were helped by higher rates. I am confused.
Also, please explain to me what sectors of economy are best positioned to profit off the forecasted interest increases and what sectors will be hurt the most. – Marcel B.
A – Banks normally benefit from higher rates because it allows them to increase their spreads – the difference between the interest they pay on deposits and GICs and the amount they charge borrowers. This is technically known as net interest margin (NIM).
Insurance companies also normally benefit from higher rates, for slightly different reasons.
However, this is a broad guideline. Other factors also come into play when assessing individual companies. For example, some analysts believe Canadian banks are carrying more mortgage risk than is reflected in the price and that has contributed to keep a lid on them. Individual banks may also have specific problems – Scotiabank’s exposure to emerging markets in Latin America and Asia has weighed on the stock in recent months.
So, while it is true that rising interest rates are beneficial to bank profits, they are not the entire story. You need to look at other aspects of the business as well.
As for utilities, they have always been considered to be interest sensitive for two reasons. First, they tend to have high levels of debt because of the borrowing costs incurred in building corporate infrastructure. Higher rates translate into more interest expense, which lowers profits.