The net interest income of a bank's traditional business can be simplified into a formula: Total Lending × Net Interest Margin (NIM). Viewed from this perspective, the Japanese banking industry has benefited from a widening NIM in a post-reflation interest rate hike environment. Meanwhile, European banking has seen a recovery in total lending demand, driven by trillion-euro infrastructure and defense investments under the European Union's "Relaunch 2.0" plan in the wake of the Russia-Ukraine conflict.
These factors together provide important support for the strong performance of European and Japanese banking and financial sectors over the past year. Of course, the sustainability of this logic still depends on monitoring the pace of monetary policy and the actual implementation of fiscal spending across various countries. If the pace of rate hikes slows down or if fiscal deployment falls short of expectations, the recovery space for traditional net interest income may correspondingly narrow.
From a medium-to-long-term perspective, banks' private banking divisions benefit from continuous AUM growth driven by the wealth effect. Their revenue can similarly be simplified into: Assets Under Management (AUM) × Return on Assets (ROA) (fee efficiency).
According to relevant market data, global major private banks achieved approximately 18% AUM growth in 2025, with the Asian market reaching around 23% and serving as a growth engine. Among them, HSBC, centered in Asia, and BNP Paribas, one of the fastest-growing players in Asia, have also been top-performing stocks over the past year. In terms of ROA, efficiency has continued to improve due to active trading and investment activities.
Together, these two drivers have fueled rapid revenue growth in private banking divisions. For banks, this segment carries relatively low risk and offers higher investment returns. This trend may help structurally enhance banks' valuations over the long term. However, private banking revenue growth is also closely tied to market activity, client risk appetite, and the regulatory environment. If market sentiment softens, the growth rates of AUM and ROA could experience volatility.
At the present juncture, we remain focused on the banking sector. Interest rate hikes continue to support banks' traditional lending businesses in the short term, while private banking serves as the medium-to-long-term secondary growth curve. From an investment perspective, key target characteristics to watch include banks that are undervalued, offer high dividend yields, and benefit from private banking operations—such as European banks with low valuations and high dividend yields, and Asian banks that benefit from wealth growth.
Overall, the allocation value of the banking industry lies in its ability to provide short-term net interest margin support while capturing the medium-and-long-term dividend of wealth growth through private banking divisions. However, specific target selection still requires a comprehensive assessment of valuations and dividend payout rates. In addition, business models, regulatory frameworks, and return on capital levels vary across regional banks; therefore, allocations should also factor in regional diversification and currency hedging dimensions.
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