The FED has increased the interest rates, and will continue to raise this year.
Rising rates, to many investors, are beneficial to banks. Banks can earn more interest income by increasing mortgage loans interests like what our three local banks did recently. $DBS GROUP HOLDINGS LTD(D05.SI)$$UNITED OVERSEAS BANK LIMITED(U11.SI)$$OVERSEA-CHINESE BANKING CORP(O39.SI)$ have also revised and repriced their mortgage loan rates higher.
However, continuing rising rates may be too much and too fast of a good thing for our banks. Non performance loans may increase due to default by existing borrowers. Businesses may find it too costly to borrow, hence demands for new loans will decline.
My view is that rising interests benefits the banks initially. In the longer term, if FED continue to raise the rates to control inflation in the US, bank profitability is likely to be affected, which in turn affect its share price.
Worst, if rising interest rates to control inflationary pressure but lead to a recession or stagflation in a weak economy, banks shares are not going to rise, or may even fall. No matter how good is the dividend payout it will not compensate the loss on capital gains.
Hence I will look for more resilient and defensive stocks rather than investing in banking and financial sectors.
Just my opinion only. Please invest according to your own investment objectives and time horizon. Best wishes.
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How about the potential recession, increasing number of defaults and fear of lending, which could be likely scenarios thanks to increasing rates. Banks can't benefit from this I suppose.