The Bank of Canada’s rate decision is rapidly approaching. The current rate sits at 2.25%, but inflation pressures and ongoing trade uncertainty are making the outlook unclear.
The decision could impact borrowing costs for both consumers and businesses. For some businesses, that impact could be significant. Consumers, on the other hand, are already reeling from rising prices and increased debt, so a rate increase could add more hardship.
Here’s a look at three different well-known stocks on the market and how they would handle the Bank of Canada’s rate decision.
Scotiabank: Watch borrowers and lending margins
Bank of Nova Scotia (TSX: BNS) is one of Canada’s big bank stocks. And when it comes to lending, the rate change could impact its business and consumer lending businesses.
Lower rates make borrowing more affordable, encouraging households and businesses to take out loans. They also provide relief for customers carrying variable-rate debt by reducing interest charges.
Conversely, higher rates push in the opposite direction and make borrowing and debt more expensive.
From an earnings standpoint, banks earn a spread between lending income and funding costs. A rate increase could lift lending income, although higher funding costs could offset that benefit. Higher rates could also reduce demand for further borrowing.
In terms of results, in the most recent quarter, Scotiabank’s Canadian Banking segment reported earnings of approximately $1.1 billion. That’s a 12% improvement over the same period last year. The bank also reported a fifth consecutive quarter of margin expansion, which is something for investors to note.
Specifically, if rates rise, will credit losses increase as borrowers struggle to meet their obligations?
Turning to income, Scotiabank offers a 3.6% dividend yield. The bank has paid out dividends for well over a century, which includes countless interest rate hikes.
RioCan: Keep an eye on refinancing costs
Another investment that is worth looking at is RioCan (TSX: REI.UN). RioCan is one of the larger REITs on the market and provides a more direct connection between interest rates and property financing.
RioCan borrows to support its real estate business. As that debt approaches maturity, it could be renewed at different rates. If those rates are less favourable, that squeezes the REIT’s ability to pay out its monthly distribution.
As of the time of writing, RioCan offers a yield of 5.6%. That means a $15,000 investment in the REIT will generate an income of just over $830. In the most recent quarter, the REIT reported a retail committed occupancy rate of 98.8%.
Fortis: Follow the cost of funding growth
Wrapping up the three investments that could be impacted by the Bank of Canada’s rate decision is Fortis (TSX: FTS). Fortis is one of the largest utility stocks in North America.
Utilities provide a necessary service, but funding those assets and various upgrades to those facilities requires large amounts of financing.
In other words, if rates rise, the cost of undergoing those upgrades also rises. That could make funding those projects more expensive.
In the case of Fortis, the company has a massive $28.8 billion capital plan that extends through 2030. Fortis expects that spending to expand its regulated asset base and support annual dividend increases of 4–6% through 2030.
Speaking of dividends, Fortis offers a respectable 3.3% yield. The utility has also provided investors with upticks to that dividend for over 50 consecutive years without fail.
Finally, investors should note that, like Scotiabank, Fortis has an international presence. The utility also has operations in the U.S. and the Caribbean. This means some of Fortis’ borrowing costs depend on interest rates outside Canada.
How to approach the Bank of Canada’s rate decision
The trio of stocks mentioned above can each be impacted by the Bank of Canada’s rate decision in different ways. Those effects may take time to emerge.
That being said, the stocks mentioned above would do well as part of a larger, well-diversified portfolio.