Bay Street investors bets on June rate cut to boost bank stocks

Analysts also predict a June rate cut could help ease mortgage renewal pressures for Canadian homeowners

Bay Street investors bets on June rate cut to boost bank stocks

Investors on Toronto’s Bay Street are increasingly betting on a June rate cut in Canada, potentially boosting the country's long-suffering bank stocks, as reported by the Financial Post.

The S&P/TSX Banks Index has risen just 0.9 percent this year, compared with a 6.7 percent gain for Canada’s benchmark S&P/TSX Composite. Concerns about high interest rates, a wave of mortgage renewals, and rising loan losses have challenged the banking sector.

Over the past five years, the banks index has gained 19 percent, about half of the 37 percent surge of the broader Canadian stock gauge.

A cooler-than-expected inflation report in May has led analysts to increase the chances of a June rate cut to 65 percent from 40 percent just a week earlier.

Investors expect Canada’s central bank to lower rates ahead of the United States Federal Reserve, given the high indebtedness of Canadian households and slower growth.

“What the rate cuts will mean for an economic outlook is much more positive,” Jefferies LLC analyst John Aiken said. “Given the Canadian banks are beta play on the Canadian economy, anything that helps the Canadian economy will be beneficial to their bottom line.”

Banks can expect some relief as the first rate cuts roll in, easing their cost of funding, Aiken said. While some loans will be repriced in tandem with a lower policy interest rate, they will still have a higher rate compared with two years ago. Even if it is a moderate impact, it is still beneficial, he noted.

Bank of Nova Scotia is the next Big Six bank to report results on Tuesday before North American markets open. Toronto-Dominion Bank managed to exceed analyst expectations in its results last Thursday.

Despite a recent rally in bank shares, IG Wealth Management Chief Investment Strategist Philip Petursson said the potential upside from a rate cut is already priced in.

“I certainly wouldn’t be trading on the potential for a Bank of Canada cut to say, ‘Oh, this is gonna provide a meaningful lift for financials,’” he said.

Others are more optimistic. A rate cut would provide a sentiment lift for Canadian banks, according to Greg Taylor, chief investment officer of Purpose Investments. It would help “stave off or make less severe the housing problems,” he said.

Last week, Canada’s banking regulator warned of a payment shock faced by homeowners renewing their mortgages, who may see their interest payments rise dramatically.

The Office of the Superintendent of Financial Institutions warned that 76 percent of outstanding mortgages as of February are up for renewal by the end of 2026. The longer rates stay elevated, the more strain these households will face, representing a risk to the banks holding these mortgages.

Peter Routledge, the superintendent of financial institutions, described the wave of upcoming renewals for variable-rate mortgages with fixed payments as a “mouse in the snake” — an issue banks will have to digest.