7 financial stocks that could benefit from rising interest rates

While interest rates remain high, it gives investors a good opportunity to consider these financial stocks for rising interest rates. An increase in interest rates often leads to increased net interest margins for banks and other financial institutions. This is because the difference between the cost of funds and the income from the loans is greater.

Although expectations of future interest rate cuts in the US have brought some uncertainty, for now, high rates remain stable. So this is beneficial for financial organizations working in this field.

Meanwhile, countries such as Japan have controversially decided to 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 rising interest rate financial stocks to achieve international diversification and also benefit from these tailwinds.

Let’s look at seven stocks that investors should consider adding to their portfolios.

Sumitomo Mitsui Financial Group (SMFG)

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Sumitomo Mitsui Financial Group (NYSE:SMFG) is a good investment candidate, especially when global investors are looking for undervalued dividend stocks, especially in strong economies.

SMFG has shifted its focus to strengthening its wealth management arm, and this is in sync with Japan’s rapidly aging population. Although SMFG has grown considerably in the recent past, its price-to-book ratio is currently 0.78, which is unusual for a bank, as it should be trading near or above the value of its assets.

Furthermore, with improving profitability metrics such as a 9% ROE target by FY2029, SMFG is not only a strong dividend payer but also a solid growth prospect. It pays a strong dividend yield of 2.94%. This has grown steadily over the years, which balances income and growth potential. I predict that SMFG will make a strong positive move in the near future ca Nikkei 225 is in a recovery area.

Mitsubishi UFJ Financial Group (MUFG)

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Mitsubishi UFJ Financial Group (NYSE:MUFG) is another one of those financial actions to raise interest rates. As the largest financial group in Japan, MUFG is a leader in the domestic market thanks to its well-developed network of branches and ATMs.

In addition, MUFG has an international operation that spans all of Asia, which gives it other sources of income besides the Japanese market. The company’s strong balance sheet, which surpasses many giants in the Western banking sector, is another reason for investors to consider MUFG. It is the largest non-Chinese banking group globally, accounting for 8.1% of all 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 predict an increase in revenues by 14.08% in the next 5 years. I don’t think this is fully reflected in its share price at the time of writing, especially given the sell-off in the Nikkei.

Morgan Stanley (MS)

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Morgan Stanley (NYSE:girl) continued to strengthen its position as a leading firm in the financial services sector after the release of its financial report for the second quarter of 2024. The firm achieved net income of $15 billion, which represents substantial growth year over year.

One point in MS’s quarterly stock report caught my eye. It wrote “Net interest income declined from a year ago on lower average deposits, reflecting the cumulative effect of customer cash redeployments in a higher interest rate environment.”

My guess is that as interest rates fall, customers will return to keeping their accounts funded in their checking 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 may improve the profitability of MS stock going forward. These catalysts may also apply to other stocks on this list. But given the relatively smaller deposit base of MS stock, this could have a huge impact on its profitability margins.

US Bancorp (USB)

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Buying shares of US Bancorp (NYSE:USB) can be a profitable move for investors looking for financial stocks for rising interest rates. This is due to the consideration of the company’s strong results in the second quarter of the year when it beat market expectations. USB reported EPS of 97 cents, which beat analysts’ consensus estimates of 94 cents per share. Revenue and interest margin also beat expectations at $6.87 billion and $4.02 billion, respectively.

There are some fears of a possible recession in the US, which have been dismissed by financial analysts and commentators over the past three years. As such, stocks like USB have seen their share prices decline, falling 2.29% over the past five years. However, there needs to be much more credible evidence to suggest that a recession is imminent or even likely. But my view is that the interest rate environment has substantially increased these risks.

Charles Schwab (SCHW)

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Charles Schwab (NYSE:SCHW) is an excellent choice for investors looking for financial stocks for rising interest rates. This is due to the company’s excellent financial statements and a well-placed business in the financial services sector. SCHW recorded record client assets of $9.4 trillion in Q2 FY24. Its AUM grew 17% year over year to $4 trillion, boosted by equity market appreciation and healthy net new money inflows from organic growth.

The bank also said it saw a 17 percent increase in net new core assets, which now stand at $61.2 billion. So I believe SCHW is well positioned to continue to earn from its clients’ accounts and deposits even in a declining interest rate environment. Banks like SCHW may also benefit from higher share prices as investors turn to risky assets in search of yield, primarily through its brokerage fees.

Bank of America (BAC)

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As one of America’s largest banks, Bank of America (NYSE:ferry) should definitely be on the watch list, even if interest rates fall. However, BAC has proven to be highly leveraged in the face of rising interest rates due to its high net interest income.

In Q2 FY24, BAC reported $13.9 billion in NII, which I believe is a result of the bank’s proficiency in managing its large pool of floating rate assets. BAC’s NII is expected to rise by $600 million by the end of the year, even despite interest rate cuts due in September.

This means that the BAC could be one of those financial stocks to raise interest rates, especially if the Fed decides to hold rates steady. This is a dissenting but still likely cause, given that inflation concerns still exist in various sectors of the US economy. BAC will do well in either scenario.

JPMorgan (JPM)

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JPMorgan(NYSE:JPM) a bank with the largest deposit base in the US, 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 earnings rose 7.8% year-on-year. JPM’s return on tangible equity (ROTCE) continues to lead the industry, consistently delivering returns in the low 20% range.

The main reason I am bullish on JPM is that analysts have solid forecasts for the future. Namely, its EPS is expected to reach $14.68 by 2027, which will see it grow significantly from today’s level.

The company may be fairly valued now, but the quality of its credit book and balance sheet give it a strong advantage in a downturn. So I rate JPM stock as a buy for investors who have a lower tolerance for risk in the markets.

At the time of publication, Matthew Farley did not hold (either directly or indirectly) any position in the securities mentioned in this article. Opinions expressed are those of the writer, subject to InvestorPlace.com Publishing Guidelines.

At the time of publication, the responsible editor had (either directly or indirectly) no position in the securities mentioned in this article.