Are Bank Stocks a Buy When Interest Rates Rise? | Investigating the Reality Behind Record Profits

On November 13, the interim financial results for the three megabanks were released. All showed strong performance, and dividend increases and share buybacks were also announced.

As someone who holds bank stocks, this is welcome news.

Banks make more profit when interest rates rise. I thought so too.

In fact, at Mitsubishi UFJ, net interest income—the difference between interest earned from loans and interest paid on deposits—increased by 411.2 billion yen compared to the same period last year.

But are bank stocks really a buy just because interest rates are rising?

Looking a bit closer at the financial results, I found that there was a loss of approximately 196 billion yen from bond trading, such as government bonds. At first, this was a concerning figure.

However, this loss was due to the sale of assets, primarily U.S. mortgage-related bonds, as part of a review of their holdings.

They made the management decision to realize losses in order to reallocate assets in anticipation of future interest rate fluctuations. Of course, whether that decision was correct remains to be seen in the future results.

Also, if interest rates rise, the interest paid to depositors increases, and if the burden of corporate borrowing becomes too heavy, there is a risk that the money lent cannot be recovered.

Although banks are private companies that pursue profit, they are also entities that support the credit of society as a whole. That is precisely why banks are required to both increase profits and maintain safety.

As a shareholder, I am happy about the dividend increase, and I also want the banks themselves to grow.

But I feel that buying bank stocks simply because interest rates are rising is not the right approach.

How much will profits actually increase due to rising interest rates, and what risks are being taken on behind the scenes? And has that strong performance already been priced into the stock?

Through yesterday’s financial results, I have more things to consider when looking at bank stocks.

To those reading for the first time

I started investing at 63, and now I research and write about the questions I have daily regarding investment and economic news.

If you’d like, please take a look at my other articles.

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※This article is a record of my personal experience. Please invest at your own risk.
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