While interest rates remain high, it offers a good opportunity to investors to consider these financial stocks for rising interest rates. An increase in interest rates often results in increased net interest margins for banks and other financial institutions. This is because the difference between the cost of funds and the income from loans is wider.
Although the expectation of future rate cuts in the U.S. has brought some uncertainty, at the moment, the high rates remain stable. So, this is beneficial for financial organizations that work in this field.
Meanwhile, countries such as Japan have decided to controversially raise interest rates, along with Indonesia and several other countries in the Asia-Pacific region. Now might be a good time to consider investing in these financial stocks for rising interest rates to achieve international diversification and also benefit from these tailwinds.
Let’s delve into seven stocks that investors should consider adding to their portfolios.
Sumitomo Mitsui Financial Group (SMFG)
Sumitomo Mitsui Financial Group (NYSE:SMFG) is a good investment candidate, especially when global investors are in search of undervalued dividend stocks, particularly in strong economies.
SMFG has shifted its focus toward strengthening its wealth management arm, and this is in sync with Japan’s population which is rapidly aging. Although SMFG has risen considerably in the recent past, the price-to-book ratio is currently 0.78, which is unusual for a bank as it should trade near or above its asset value.
Furthermore, with improving profitability metrics such as an ROE target of 9% by fiscal year 2029, SMFG is not just a strong dividend payer but also a solid growth prospect. It pays a strong dividend yield of 2.94%. This has risen steadily over the years, which balances its income and growth potential. I foresee that SMFG will make a strong upside move in the near future as the Nikkei 225 is in a territory of recovery.
Mitsubishi UFJ Financial Group (MUFG)
Mitsubishi UFJ Financial Group (NYSE:MUFG) is another one of those financial stocks for rising interest rates. Being the biggest financial group in Japan, MUFG is a leader in the domestic market, thanks to the well-developed network of branches and ATMs.
Furthermore, MUFG has an international operation that spans across Asia, which gives it other sources of income aside from the Japanese market. The company’s robust balance sheet, which outstrips many Western banking giants, is another reason for investors to consider MUFG. It is the largest non-Chinese bank group globally, accounting for 8.1% of all of Japan’s loans.
Thus, MUFG may be one of the strongest beneficiaries of rising interest rates in Japan, as this would naturally attract even more deposits. Analysts project revenue growth of 14.08% over the next 5 years. I don’t think this is fully reflected in its stock price at the time of writing, especially considering the sell-off in the Nikkei.
Morgan Stanley (MS)
Morgan Stanley (NYSE:MS) has continued to cement its position as a leading firm in the financial services sector after releasing its second-quarter 2024 financial report. The firm achieved net revenues of $15 billion, which is a substantial increase year-over-year.
One point from MS stock’s quarterly report caught my eye. It read “Net interest income decreased from a year ago on lower average sweep deposits reflecting the cumulative effect of cash redeployments by clients in a higher interest rate environment.”
My view is that as interest rates fall, clients will return to keeping their accounts funded in their sweep accounts, which could lead to more stable deposit levels and higher margins. The other argument is that lower interest rates increase the demand for loans, which can improve MS stock’s profitability in the future. These catalysts can apply to other stocks as well on this list. But with MS stock’s relatively smaller deposit base, it could have an outsized impact on its profitability margins.
U.S. Bancorp (USB)
Buying shares of U.S. Bancorp (NYSE:USB) may be a profitable move for investors seeking financial stocks for rising interest rates. This is from taking into account the company’s solid results of the second quarter of the year when it outperformed market expectations. USB reported an EPS of 97 cents which surpassed analyst consensus estimates of 94 cents per share. Revenue and its interest rate margin also beat expectations, at $6.87 billion and $4.02 billion, respectively.
There are some fears of a possible recession in the U.S., which have been kicked around by analysts and financial commentators over the past three years. As such, stocks such as USB have seen a drop in their stock prices, with it falling 2.29% over the past five years. Still, there needs to be much more credible evidence to suggest that a recession is coming, or even likely. But my view is that the interest rate environment has substantially increased these risks.
Charles Schwab (SCHW)
Charles Schwab (NYSE:SCHW) is a great pick for investors seeking financial stocks for rising interest rates. This is due to the company’s excellent financials and a well-placed business in the financial services sector. SCHW posted record client assets of $9.4 trillion in Q2 FY24. Its AUM grew by 17% YOY to $4 trillion, boosted by equity market appreciation and healthy net new money inflows stemming from organic growth.
The bank also said it had a 17 percent increase in core net new assets which now stand at $61.2 billion. So, I think SCHW is well positioned to continue earnings from its client accounts and deposits even in a falling interest rate environment. Banks like SCHW may also benefit from rising stock prices as investors pivot to risk assets in search of yield, primarily through its brokerage fees.
Bank of America (BAC)
As one of America’s largest banks, Bank of America (NYSE:BAC) should definitely be on one’s watch list, even if interest rates fall. Nonetheless, BAC has turned out to be very influential in the face of increasing interest rates due to its high net interest income.
In Q2 FY24, BAC reported $13.9 billion in NII, which I feel is the result of the bank’s proficiency in managing its large floating-rate pool of assets. BAC’s NII is expected to rise by $600 million by the end of the year, even despite the projected rate cuts in September.
This means that BAC could be one of those financial stocks for rising interest rates, especially if the Fed decides to hold rates steady. This is a dissenting, but still probable cause of action, given that inflation concerns still exist across various sectors in the U.S. economy. BAC will do well in either scenario.
JPMorgan (JPM)
JPMorgan, (NYSE:JPM) a bank with the highest deposit base in the U.S., presents a great opportunity for investors. The bank’s Q2 FY24 earnings report painted a picture of a bank with solid core earnings, as its adjusted revenue increased by 7.8% YOY. JPM’s return on tangible common equity (ROTCE) continues to be industry-leading, consistently delivering returns in the low 20% range.
The main reason I’m bullish on JPM is that analysts have solid future forecasts for it. Namely, its EPS is expected to reach $14.68 by 2027, which will see it be up significantly from today’s level.
The company might be fairly valued now, but the quality of its loan book and balance sheet gives it a strong edge in the event of a recession. So, I rate JPM stock a buy for investors who have less risk tolerance in the markets.
On the date of publication, Matthew Farley did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
