Two Mechanisms by Which Banks Profit from Rising Interest Rates | Why I Still Don't Chase Bank Stocks
“It seems banks make money when interest rates rise. So, shouldn’t I just buy bank stocks?”
If you have ever thought that, I will give you the conclusion first.
It is not by chance, but by structure, that banks profit from interest rate hikes. However, there is no need to chase bank stocks now that they have gained attention. If you hold an all-country equity fund, you are already receiving those benefits.
In this article, I will confirm the two mechanisms by which banks profit from interest rate hikes using the financial results of Japan’s largest banking group. Furthermore, I will discuss why I, as a holder of megabank stocks, am not buying more right now, and what individuals should truly re-evaluate.
A bank’s way of making money is simply to ‘buy low and sell high’
There are three ways banks make money.
1. Accepting deposits from everyone.
2. Lending that money out.
3. Investing the remaining money in the market.
That is all.
I spent a total of 18 years working inside financial institutions, including credit unions and the post office. Even from the inside, this business is simple.
It is easy to understand if you think about fish. If a wholesaler buys fish from a fisherman for 100 yen and sells it for 100 yen, the profit is zero. If they sell it for 120 yen, the profit is 20 yen. If a supermarket sells that fish for 150 yen, the supermarket’s share is 30 yen.
Taking a profit is not a bad thing. If there is no profit, there are no wages for the workers. Buying low and selling high is standard in any business.
When applied to a bank, the purchase price is the deposit interest rate, and the selling price is the lending interest rate.
That is why it makes no sense to listen to people who invite you to expensive seminars while claiming they are ‘doing it for your sake.’ Financial salespeople are not financial professionals; they are professionals at selling financial products. This is a matter of structure, not individual malice. You are drawn to such places because you approach them with the intent to make money. That is why I keep saying that passive investing is fine.
Mechanism 1: Deposit interest rates rise slowly, while lending interest rates rise quickly
When interest rates rise, banks raise their purchase prices slowly and their selling prices quickly.
Deposit interest rates are kept at a level that says, ‘Well, we’ll keep it around here,’ and they follow with a slight delay even when market interest rates rise. On the other hand, people who borrow money are in a position where it is difficult to complain even if interest rates are raised. Therefore, lending interest rates rise immediately in line with interest rate hikes.
Let’s confirm with numbers. This is the combined total of two subsidiaries of Japan’s largest banking group. The domestic lending yield rose from 1.04% in the fourth quarter of fiscal year 2023 to 1.32% in the fourth quarter of fiscal year 2025. During the same period, the yield on deposits and the like went from 0.11% to 0.26%. While lending rose by 0.28 percentage points, deposits rose by 0.15 percentage points. The difference in yield has widened from 0.93% to 1.05%.
Looking at the breakdown of deposits, 77% are liquid deposits such as ordinary deposits. This is a part where there is no need to rush to raise interest rates. Conversely, 43% of loans are linked to market interest rates, so rate hikes have a direct effect.
Has the interest on your ordinary deposit increased enough to change your life? As long as you are on the depositing side, the benefits of rate hikes arrive late and only slightly.
▼Primary sources referenced in this chapter
・Mitsubishi UFJ Financial Group “FY2025 Financial Results Investor Presentation” materials (May 19, 2026) Domestic deposit and loan yields, composition of deposits and loans (combined for two banks)
https://www.mufg.jp/dam/ir/presentation/2025/pdf/slides2603_ja.pdf
Mechanism 2: Money left at the Bank of Japan without being lent out also earns interest
There is one more reason why banks profit from rate hikes: the money they keep at the Bank of Japan.
On the balance sheet for the same two-bank combination (as of the end of March 2026), there are 179 trillion yen in deposits, while loans are 73 trillion yen. And there are 68 trillion yen in current account deposits at the Bank of Japan. A large portion of the money collected is being kept at the Bank of Japan rather than being lent out.
This Bank of Japan current account deposit earns interest (supplementary interest), excluding the portion that corresponds to the required reserve amount. With the decision on June 16, 2026, the policy interest rate became approximately 1.0%, and the supplementary interest rate also became 1.0%. Furthermore, with the decision on September 18, the policy interest rate rose to approximately 1.25%, and the supplementary interest rate also rose to 1.25% (applied from September 24).
Since the counterparty is the Bank of Japan, there is no risk of default. Interest that barely existed until a little while ago rises with every rate hike. On the other hand, the yield paid to depositors was 0.26% as of the fourth quarter of fiscal year 2025.
The reason I always say “time deposits are a sub-optimal substitute for government bonds” is because of this structure. Banks take money collected from depositors at low interest rates and place it at the Bank of Japan or lend it out at higher interest rates. That difference is the bank’s share.
This banking group indicates a profit increase effect of “180 billion yen per 0.25% interest rate rise.” However, reading the footnotes, this is the figure for the third year after the interest rate rises. It is 100 billion yen in the first year and 150 billion yen in the second year. The premises are “that the structure of the balance sheet does not change” and “that market interest rates rise by the same amount as the rate hike.”
With the rate hikes from the lifting of negative interest rates to 0.75% in December 2025, the profit increase effect is expected to accumulate from 240 billion yen in fiscal year 2025 to 525 billion yen in fiscal year 2028. 525 billion yen is not the current performance, but the company’s forecast. Since the materials are dated May 19, 2026, the rate hikes in June and September are not included.
Read even the footnotes for large numbers. Note that I checked the materials of one company, and it does not necessarily mean that other banks have the same figures. This is also not a recommendation for any specific stock. Including insurance companies, the financial industry has a structure that makes it easy to profit from rising interest rates.
▼Primary sources referenced in this chapter
・Mitsubishi UFJ Financial Group “FY2025 Financial Results Investor Presentation” materials (May 19, 2026) Yen balance sheet, impact of yen interest rate rise (combined for two banks, including footnotes)
https://www.mufg.jp/dam/ir/presentation/2025/pdf/slides2603_ja.pdf
・Bank of Japan “Change in Guideline for Market Operations” (June 16, 2026)
https://www.boj.or.jp/mopo/mpmdeci/mpr_2026/k260616a.pdf
・Bank of Japan “Change in Guideline for Market Operations” (September 18, 2026)
https://www.boj.or.jp/mopo/mpmdeci/mpr_2026/k260918a.pdf
The reason why I still won’t buy more bank stocks now
You might think, “Then bank stocks are a buy.” My answer is that I won’t be buying more right now.
First of all, for those who hold All Country (Orkan), major Japanese bank stocks are already included in that. You have already received the benefits of the interest rate hikes over the past two to three years through All Country. There is no need to go out of your way to buy them.
Let me talk about my own situation. My Japanese stock portfolio is a “Paguo’s Bento Pack,” where I hold a little bit of various industries, centered on small-to-mid-cap stocks with consecutive dividend increases. However, since banks are an industry where large-cap companies are stronger than small-to-mid-cap ones, I also include megabank stocks. I bought them in October 2022. This was back when people were saying “interest rates won’t rise” and “Japanese banks are no good,” before the interest rate hikes began in earnest.
(Source: Blog post “If the main characters change every month, hold them all | Reading two investment magazines as contrarian indicators”)
I still hold them today.
Even so, I won’t buy more now. My individual stock approach is a medium-to-long-term contrarian strategy. The performance is good, but no one is looking at them, and the stock price has fallen. If the ratio of such stocks in my bento pack drops, I buy a little more. Sometimes they don’t go up for three or five years. Even then, I don’t sell just because they’ve become cheap.
Right now, money is easily gathering in AI, semiconductors, and banks, which have attracted attention due to rising interest rates. Investment magazines have also featured banks. Where everyone’s attention is focused does not fit my approach. This is my personal method, and I am not recommending that you imitate it.
To be honest, it is difficult to keep balancing the composition of individual stocks. That is why I recommend All Country to you as always. With All Country, the ratio of strong companies automatically increases, and weak companies automatically decrease. All you have to do is steadily accumulate. To see how much your monthly investment will be worth in the future, please try using the
New NISA Accumulation & Withdrawal Simulator
once.
For me personally, the ultra-long-term pillar of my stock portfolio is All Country. Placing global stock indices at the center of my asset formation originated from what I learned from Ryogakucho (Liberal Arts University).
What to reconsider due to rising interest rates is “where to put your money”
There is something more important than bank stocks. Now that interest rates have risen, the question is where to put money that you don’t want to take risks with.
Money you will use soon, in other words, your emergency fund, should be kept in a savings account. The problem is money that you won’t use immediately but are afraid of seeing the stock price drop. Please put this money into Japanese Government Bonds for Individuals.
However, even with government bonds, fixed-rate interest-bearing government bonds sold at bank counters are not suitable for a phase where interest rates are rising. For the depositor, variable rates are advantageous.
The difference is written in detail in
For the borrower, it is the opposite. It is disadvantageous to borrow at a variable interest rate when interest rates are rising. If the situation changes to one where interest rates are falling, the answer flips: fixed is better for depositing, and variable is better for borrowing.
I also talk about what happens between the lender and the borrower in
this video.
One more thing. When interest rates rise, investment pitches claiming “high yields in yen,” “principal protection,” and “redemption in six months” increase. Because you can invest in yen, some people get involved in things like real estate crowdfunding. Please stay away from investment pitches that promise principal protection or Ponzi schemes that pay dividends using new capital. The standard, proven path is enough.
Finally, it is not about one single asset, but ensuring your entire portfolio does not lose to inflation. In an era of interest, this is the most important thing.
Summary: Banks are the first to receive the benefits of rate hikes
Deposit interest rates rise slowly, while lending rates rise quickly. Money left at the Bank of Japan without being lent out also earns interest. These are the two mechanisms by which banks profit from rate hikes.
I understand the structure. However, there is no need to chase bank stocks just because they are getting attention now. If you hold All Country, you are already receiving the benefits. What individuals should review is where they keep their money.
There is only one thing to do today. Check how much “money you won’t use immediately” you have in your savings account, excluding your emergency fund.
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*Puguo is a supporting member of LibeCity. The foundation of my asset formation was learned from the philosophy of Ryogakucho (Liberal Arts University).
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