Part 3 · Interest rates: the price of money · Lesson 18
Interest rates and sectors: why do banks and insurers differ?
Interest is income for some sectors and a cost for others. The same rate hike makes some sectors smile and others cry.
QToday's question
When rates rise, do all stocks suffer equally? Are there sectors that actually welcome it?
In 2022 the Korean stock market lost a quarter of its value over the year. Yet in the same year an insurance sector ETF actually rose close to 15%. That is because interest is a 'cost' for some companies and 'income' for others. In this lesson, we sort out how the impact of rates splits depending on how a company's money comes in and goes out.
MAPLearning map for this lesson
We build it up in three steps. At the end of each step, a 'Quick check' lets you test your understanding before moving on.
In Lesson 12 you learned that interest is a cost to borrowers and income to lenders. In Lesson 15 you saw that bonds you already hold fall in value when rates rise, and in Lesson 17, just before this, that growth stocks selling distant earnings are weak against rates. This lesson ties these three together into a sector map, closing out Part 3.
- STEP 1 · Basic conceptsIs interest income or a cost?
You can look at how a company's money flows in and out and tell whether interest is income or a cost for that sector.
- STEP 2 · Understanding the mechanismHow banks and insurers earn from interest rates
You can calculate the and , and explain how insurers earn from interest rates and where that stops working.
- STEP 3 · Real-world applicationThe 2022 sector scorecard and the exceptions
You can identify the winners and losers of a rate-hiking period using real sector data, and point out cases where the formula breaks, like the SVB collapse.
STEP 1Is interest income or a cost?
The reason the same rate hike works differently on each sector is simple. Each company has different paths for money coming in and going out.
An easy analogy · a shop that buys money wholesale and sells it retail
A bank is a 'money shop'. It borrows money from depositors at 2% a year (buys wholesale) and lends it to borrowers at 5% a year (sells retail). That 3% difference is the shop's margin.
When rates rise, this shop often raises its selling price (loan rate) first and its buying price (deposit rate) a little later. In between, the margin widens. Conversely, customers who bought a lot of money from this shop, that is, companies with a lot of debt, see their monthly interest grow with the same rate hike.
The interest rate figures are examples to aid understanding.
Let's split sectors into three groups
In Lesson 12 we said interest is income to lenders and a cost to borrowers. Splitting sectors by this standard sums up the impact of rates at a glance.
Those who lend money and put it to work
Banks and insurers. Earning interest from loans and bond investments is their core business, so income tends to rise when rates rise.Rates ↑ usually favorableThose who borrow a lot of money
Construction, real estate and , and heavily indebted companies. Interest costs rise, and when loan rates go up, demand for buying homes and buildings falls too.Rates ↑ usually unfavorableThose who sell distant future earnings
Growth stocks (software, biotech and so on). As seen in Lesson 17, when the discount rate rises, the present value of distant earnings shrinks sharply.Rates ↑ heavy multiple burdenOf course, a single company can straddle several groups. A bank is also a company that borrows money, and a construction company also deposits cash and earns interest. The key is which grows faster and larger when rates rise: the interest coming in or the interest going out.
Why do heavily indebted sectors get hurt twice?
Construction and real estate are doubly exposed to rising rates. First, they borrow heavily for construction and development, so their interest costs rise directly. Second, when mortgage rates go up, fewer people want to buy homes, so sales and revenue both fall. In terms of the supply and demand from Lesson 3, rising rates are a force pushing the demand curve for real estate to the left.
, which pay out building rental income, weaken for another reason. Investors compare a REIT's dividend yield with safe government bond yields, and when bond yields rise, a REIT paying the same dividend becomes less attractive, so its price has to fall to restore balance. It is the same principle as the bond seesaw in Lesson 15.
Quick checkOne company has lots of cash and almost no debt, and another has debt as large as its revenue. If rates rise 2 percentage points, whose earnings are shaken more?
STEP 2How banks and insurers earn from interest rates
In STEP 1 we said banks and insurers are generally favored by rising rates. Now let's work out with numbers 'how much', and 'for how long'.
Core bank profit = interest spread × money lent
Banks lend out the money they gather as deposits and earn from the rate difference. The amount lent is so large that even a small widening of the spread greatly increases earnings.
Loan-deposit spread and net interest margin
The loan rate minus the deposit rate is called the . As a gauge of a bank's overall skill at the interest business, we use the . It is interest earned minus interest paid, divided by total interest-earning assets.
See it in a chart: a hypothetical bank's loan-deposit spread
This is a hypothetical bank with KRW 100 trillion in loans and KRW 100 trillion in deposits. Move the loan rate and the deposit rate. When rates are rising, the loan rate usually goes up first and the deposit rate follows.
Interest income KRW 3.0 trillion − interest expense KRW 1.2 trillion = net interest income KRW 1.8 trillion
Switch from 'Low-rate period' to 'Early hikes'. The spread widens from 1.8 percentage points to 2.6 percentage points, and net interest income grows about 44%, from KRW 1.8 trillion to KRW 2.6 trillion. But press 'When the deposit rate catches up' and the margin actually narrows to 1.3 percentage points. What favors a bank is not a 'high level' of rates itself but the stretch when the loan rate rises faster than the deposit rate.
The hypothetical bank's size and rates are examples to aid understanding. Real banks also raise funds by issuing bonds and other means besides deposits, and each type of loan carries a different rate.
Real numbers for domestic banks
Domestic banks' net interest margin (NIM)
Domestic banks' net interest income
Source: FSS, 'Domestic Bank Performance in 2022 (preliminary)' (2023-03-16) and 'Domestic Bank Performance in 2023 (preliminary)' (2024-03-14). Confirmed through Etoday and Hankyoreh reports. Checked 2026-10-05.
In 2022, when the Bank of Korea raised its policy rate from 1.00% to 3.25%, domestic banks' net interest margin rose from 1.45% to 1.62%, and grew about 22%, from KRW 46.0 trillion to KRW 55.9 trillion. In 2023, net interest income hit a record high again at KRW 59.2 trillion. However, the quarterly net interest margin began to decline after peaking in Q4 2022. Deposit rates followed upward and market rates passed their peak, so the margin narrowed again.
Insurers are companies that 'invest for the long haul'
Insurers collect premiums from customers and pay out claims over decades. In the meantime, they invest the large pool of money that builds up, mainly in bonds. When rates rise, newly bought bonds pay more interest and investment income grows. For a company with many insurance products that promised high rates long ago, rising rates are news that eases the burden.
But there is a flip side. When rates rise quickly, the value of bonds already held falls (Lesson 15), creating an on the books, and capital soundness indicators can worsen. Rising rates are generally welcome for insurers, but even more so when they rise 'slowly'.
Common misconceptions
- "When rates rise, bank stocks always rise?"
- No. If rates rise too fast, more borrowers fail to repay, credit costs grow and loan demand falls. If deposit rates follow upward, the margin narrows again. In 2022, KODEX Banks also fell on a price basis (STEP 3).
- "The higher the rates, the better for banks?"
- What determines the margin is not the level of rates but the 'gap' between the loan rate and the deposit rate and how fast it 'changes'. If rates stay high for a long time, deposit rates catch up and the advantage fades.
- "Construction stocks move only because of interest rates?"
- Interest rates are a big variable, but real estate policy, commodity prices and overseas orders matter a lot too. Interest rates are just one of the 'forces that tilt the direction'.
Quick checkThe loan rate rose from 4% to 5%, and the deposit rate from 2% to 3.5%. What happened to the bank's loan-deposit spread?
STEP 3The 2022 sector scorecard and the exceptions
Now that you know the principle, let's open up the real scorecard. 2022, when rates rose fast in both Korea and the US, is a good year to see the differences between sectors.
Same year, different results for each sector
2022 price change of Korean sector ETFs (2021-12-30 → 2022-12-29)
Source: Naver Finance daily closes (KODEX Insurance 140700, KODEX Banks 091170, KODEX Construction 117700, KODEX Securities 102970, KODEX Healthcare 266420, TIGER Software 157490, KOSPI index), calculated by Robin Invest. Price basis excluding distributions, so the actual total returns of dividend-heavy banks and insurers are higher. Checked 2026-10-05.
In Korea in 2022, while the KOSPI fell 24.9%, the insurance sector ETF rose 14.8% and the bank sector ETF fell only 12.9%. By contrast, heavily indebted construction fell 21.6% and software, which sells distant future earnings, fell 47.5%. The securities sector, which holds many bonds and is also hit by lower trading volume, fell slightly more than the market. Press the 'Korea/US' buttons. The US shows the same shape: finance and insurance held up, while real estate (REITs) and technology fell sharply.
There are also points of caution. Banks only held up relatively well; their prices still fell. In a year when the whole market drops, even favored sectors get shaken. Also, a sector with overlapping industry conditions (the price cycle from Lesson 3), such as semiconductors in 2022, is hard to explain by interest rates alone.
An exception: the bank brought down by interest rates, SVB
There is a case where the formula 'rising rates = good for banks' broke badly: Silicon Valley Bank (SVB) in the US. During the low-rate period, SVB invested deposits that flooded in from tech startups heavily in long-maturity Treasuries and mortgage-backed securities. But when rates rose quickly in 2022, the value of those bonds fell sharply. The seesaw of Lesson 15 played out inside the bank's books.
- 2018 – 2021Deposits invested in long-term bonds
SVB's securities investments swelled from $23 billion in 2018 to $125 billion in 2021.
- End of 2022Unrealized losses pile up
Rising rates created unrealized losses of about $15.2 billion on held-to-maturity securities alone.
- March 8, 2023Announces a bond sale loss
It announced it had sold about $21 billion of bonds for an after-tax loss of about $1.8 billion and laid out a capital raise plan.
- March 9 – 10Deposit run
About $42 billion of deposits left in a single day, and on March 10 state regulators closed the bank.
Source: Federal Reserve Office of Inspector General, 'Material Loss Review of Silicon Valley Bank' (Sep 2023), FDIC announcement (Mar 2023), SVB Financial Group filing (2023-03-08). Checked 2026-10-05.
The lesson of SVB is that the impact of rates on a bank is not decided by loans alone. The longer the maturity of the bonds it holds and the faster rates rise, the larger the unrealized losses, and if depositors get nervous it can turn into a in an instant. Even within the same banking sector, the effect of rates can be the exact opposite depending on asset structure and deposit mix.
Generally favored when rates rise
Banks · Insurers
If the loan rate rises faster than the deposit rate, the spread widens, and insurers earn higher yields on newly bought bonds. However, if rates rise too fast, delinquencies and unrealized bond losses become a burden.
Generally disadvantaged when rates rise
Construction · REITs · Growth stocks
Heavily indebted sectors are hit by both higher interest costs and weaker demand, REITs lose appeal relative to government bonds, and growth stocks see their multiples shrink as the discount rate rises (Lesson 17).
For stocks, this means: a sector map by rate regime
| Rate regime | Generally favored | Generally disadvantaged |
|---|---|---|
| Early hikes (loan rates rise first) | Banks · Insurers Wider margins, better investment income | Growth stocks · REITs · Construction Discount rate and interest burden |
| Prolonged high rates | Companies with lots of cash and little debt | Heavily indebted companies; banks also feel the strain if delinquencies rise |
| Turn to cuts (market rates fall) | Growth stocks · REITs · Construction Multiple recovery, lighter interest burden | Banks Concern about a narrowing loan-deposit spread |
This table is only a starting point. When you see rate news, first ask "Is interest income or a cost for this sector, and how fast is that changing?" How the pros and cons for each sector are worked out in the current rate environment is on the Impact Map on the Macro Map, and recent trends by sector are on the Theme Map.
That is not always the case. Government lending regulations or demands for 'shared-prosperity finance', rising delinquencies from a recession, and real estate policy changes sometimes move a sector more than interest rates do. Think of interest rates as one of the forces that create a sector's 'slope'.
Quick checkNews says, "Bank of Korea starts cutting its policy rate sooner than the market expected." What impact would generally be expected on bank stocks and construction stocks?
✓What we learned today
- Interest is income for sectors that lend money and a cost for sectors that borrow. Banks and insurers are generally favored by rising rates, while heavily indebted construction and REITs and growth stocks selling distant earnings are generally disadvantaged.
- A bank's core profit is the loan-deposit spread (loan rate − deposit rate). If the loan rate rises faster than the deposit rate during a rate-hiking period, the margin widens.
- Domestic banks' net interest margin rose from 1.45% in 2021 to 1.62% in 2022, and net interest income grew from KRW 46.0 trillion to KRW 55.9 trillion. In 2023 it hit a record again at KRW 59.2 trillion.
- On a 2022 price basis, KODEX Insurance returned +14.8% and KODEX Banks −12.9%, holding up better than the KOSPI (−24.9%), while the software ETF returned −47.5%.
- The formula has exceptions. In 2023, SVB closed after deposits fled while large unrealized losses had piled up on its bond holdings from rising rates. Banks too can be hurt depending on the 'speed' of rates and their asset structure.
In Part 3 you learned that interest rates are the benchmark for all asset prices. But when setting rates, central banks look at 'employment' as much as inflation. In the first lesson of Part 4, you will learn how to read nonfarm payrolls and the unemployment rate in the US jobs report.
Quiz5-question quiz
Pick an answer and it's graded right away with an explanation.
Q1. Which sector's 'income' tends to grow when rates rise?
Banks and insurers make a business of lending and investing money, so their interest income tends to grow when rates rise. For heavily indebted sectors, interest is a cost.
Q2. A hypothetical bank has KRW 100 trillion in loans and KRW 100 trillion in deposits. With a loan rate of 5.0% and a deposit rate of 2.4%, roughly how much is its net interest income?
Interest income KRW 5.0 trillion − interest expense KRW 2.4 trillion = KRW 2.6 trillion. It equals the 2.6 percentage point spread multiplied by KRW 100 trillion.
Q3. In which case can a bank's loan-deposit spread actually narrow even though rates are high?
The margin is set by the 'gap' between the two rates, not by the level of rates. If the deposit rate follows upward by a lot, the margin narrows. Domestic banks' net interest margin also came down after peaking in Q4 2022.
Q4. In 2022, a year when the KOSPI returned −24.9% on a price basis, which is the correct sector ETF result?
Insurers and banks, which use interest as income, held up better than the market, while software, which sells distant future earnings, fell sharply. Banks' prices still fell, though.
Q5. Which principle is most closely tied to how SVB in the US closed in 2023?
SVB had put a lot of its deposits into long-term bonds, and when rates rose quickly the bond values fell, building large unrealized losses. After the loss announcement, deposits left all at once and the bank collapsed.
NextTerms · Next lesson · Related tools
The price of borrowing money. When rates rise, the present value of future earnings falls, which tends to lower stock multiples.
Policy ratePolicy rateThe policy interest rate set by a central bank (the Bank of Korea, the US Fed). It is the starting point for all other interest rates.
Loan-deposit spreadLoan-deposit spreadThe difference between a bank's loan rate and its deposit rate. When the loan rate rises faster than the deposit rate during a rate-hiking period, it widens, and if the deposit rate follows upward, it narrows again.
Net interest margin (NIM)Net interest margin(Interest income − interest expense) ÷ interest-earning assets. It is the representative indicator of how much a bank earns from its interest business. The NIM of Korean banks was 1.45% in 2021 and 1.62% in 2022.
Net interest incomeNet interest incomeThis is the interest income a bank receives from loans, bonds and so on, minus the interest expense it pays on deposits and the like. It accounts for the largest share of total earnings at Korean banks.
Unrealized lossUnrealized lossA loss on the books that arises when you haven't yet sold an asset you hold, but its current market price is lower than the price you paid. When rates rise, held bonds show unrealized losses.
Bank runBank runA phenomenon in which fear spreads that a bank is in danger and depositors rush to withdraw their money all at once. In March 2023, about $42 billion of deposits left US bank SVB in a single day before it was shut down.
Real estate investment trust (REITs)Real estate investment trustA company or fund that pools money from many investors, invests in real estate such as buildings and logistics centers, and distributes the rental income as dividends. Its dividend yield is compared with government bond yields, so its price tends to weaken when rates rise.
BondBondAn IOU issued by a government or company when it borrows money. It pays set interest and returns the principal at maturity. When interest rates rise, the price of bonds already issued falls.
Growth stockGrowth stockA stock with a high P/E because earnings, though small now, are expected to grow a lot. A large part of its earnings is in the distant future, so it is sensitive to changes in interest rates (the discount rate).
SectorSectorA group of companies in similar businesses, divided into categories such as semiconductors, banks and autos.
Cyclical stockCyclical stockAn industry or stock whose earnings swing widely with the business cycle. Semiconductors, chemicals, steel, autos and shipbuilding are typical examples.
Defensive stockDefensive stockAn industry or stock whose earnings stay relatively steady even when the economy worsens. Food and beverages, telecommunications, electricity and gas, and pharmaceuticals are typical examples.
This is educational material and not investment solicitation. There is no guarantee that past relationships will repeat in the future.