Banks Cash In On Higher Interest Rates, But Investors Get Shortchanged — Here's How You Can Still Come Out On Top

Bank failures have been in the headlines, but not all banks are struggling. In fact, at some of the biggest financial institutions in America, business is firing on all cylinders thanks to higher interest rates.

For instance, Bank of America BAC recently reported $26.3 billion of revenue for the first quarter of 2023, which represented a 13% increase year over year. Notably, net interest income grew 25% to $14.4 billion thanks to “higher interest rates and solid loan growth.”

The bank’s net income also rose 15% from a year ago to $8.2 billion.

It’s a similar story at Wells Fargo & Co. WFC. In the first quarter, the bank’s net interest income soared 45% year over year to $13.3 billion. Management attributed the increase to “higher interest rates, higher loan balances and lower mortgage-backed securities premium amortization.”

Compared to a year ago, Wells Fargo earned 17% more revenue and 32% more profits.

Citigroup Inc. C delivered an impressive earnings report as well, with revenue jumping 12% year over year and net income up 7% in the first quarter.

Still, solid growth in financials doesn’t necessarily translate to a higher share price. 

While Bank of America’s top and bottom lines both improved substantially from a year ago, the company’s shares are actually down 23% over the last 12 months. Meanwhile, Wells Fargo shares have tumbled 14%, and Citi stock is down around 7% during the same period.

The reality is that stocks are volatile. Even though banks are benefiting from rising interest rates, some of their investors are not.

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The good news? There are other ways to capitalize on this trend.

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Riding The Rate Wave

When the U.S. Federal Reserve kept its benchmark interest rates near zero, most savings accounts paid next to nothing.

Then inflation got out of control, and the Fed had to start tightening. In 2022, the U.S. central bank announced seven rate hikes.

So far in 2023, the Fed has already announced another two rate hikes, making the benchmark rate the highest it’s been since 2007.

While higher interest rates have sent shockwaves across the economy, they also mean that people can finally earn some return on their savings.

These days, there are plenty of high-yield savings accounts to choose from. And you don’t even need to visit a brick-and-mortar bank to find the ones that pay higher interest rates and charge no account fees.

Remember, higher interest rates essentially mean higher borrowing costs. So investors can capitalize on the trend simply by being a lender.

One way to do it is through private credit investments. For instance, alternative investment platform EquityMultiple offers short-term Alpine Notes with contractual fixed annual interest rates of 5.5%, 6.5% or 7%, which could be worth a look for investors looking to play defense but who aren’t satisfied with most savings accounts or certificates of deposit (CDs).

Private credit, like any other asset class, may not be suitable for everyone because of variations in individuals’ investment goals and risk tolerance. It’s important to do your own due diligence before making any investment decisions and consult a financial adviser when necessary.

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