CIBC: Canadian Bank Stocks Fell 24% in Past Rate Hikes
CIBC data shows Canadian banks dropped 24% on average during previous BoC tightening cycles, though new industrial investment may alter the trend.
Key points
- CIBC data shows Canadian bank stocks fell 24% on average during seven past rate-hiking cycles.
- Loan growth dropped to 4% in 2024 from 14% in 2022 as rates began rising.
- National Bank suggests industrial capex cycles could boost commercial loans despite consumer headwinds.
Canadian bank equities have historically underperformed during periods of rising interest rates, with average drawdowns of 24% across seven cycles since the early 1980s. According to a September 16 note reported by Yahoo! Finance Canada, CIBC analyst Paul Holden noted that these declines typically lasted eight to nine months, outperforming the broader market which saw average drops of 18% for the TSX and 16% for the S&P 500.
The Bank of Canada held its key rate steady for the seventh consecutive month in early September, citing increased inflation risks from geopolitical conflicts. While higher rates can boost bank margins in the short term, they often suppress loan growth and increase credit losses as borrowers face higher repayment costs. The current environment adds complexity, as the federal government pushes for capital expenditure in energy and defense sectors.
Historical drawdowns outpaced market averages
CIBC’s analysis indicates that the peak-to-trough decline for Canadian banks ranged from 14% during the 2004-2006 period to 35% between 1986 and 1989. This consistent underperformance relative to the TSX and S&P 500 suggests that rate-hiking cycles pose specific structural risks to the banking sector, regardless of the broader economic backdrop.
Industrial investment may offset credit risks
National Bank of Canada analyst Gabriel Dechaine argues that conventional negative factors may be outweighed by new economic drivers. He notes that while consumer loan growth slowed to 4% in 2024 from 14% in 2022, a potential capital expenditure super-cycle in natural resources and strategic industries could stimulate commercial credit growth. Dechaine suggests this shift could defy historical patterns where rate hikes uniformly hurt bank profitability.
Consumer lending faces persistent pressure
Despite potential gains in the commercial sector, consumer-facing businesses remain vulnerable. Higher interest rates make it difficult for households to service existing debt, leading to slower loan origination and elevated default risks. This divergence means banks may see mixed results, with wholesale divisions benefiting from industrial expansion while retail divisions struggle with reduced demand and higher credit costs.
