Shares of Japanese banks have been among the worst performers during the country’s massive stock market crash. The Topix Banks Index has fallen 9 percent this month, worse than the overall Japanese market’s 4 percent decline. SMFG has lost 7 percent.

Ironically, the triggers for the sell-off – a rate hike and surprisingly hawkish messaging from Japan’s central bank – should theoretically have benefited the country’s banks, allowing them to earn higher returns on loans and investments while deposit rates remained somewhat tougher.

But the rate hike, coupled with weak U.S. labor market data, has also triggered an unwinding of so-called carry trades – borrowing Japanese yen at near-zero interest to invest in other assets. As a result, some of the market’s previously most popular trades – including bets on Japanese banks – have been unwound.

The market has calmed down somewhat, but Japanese bank stocks are still trading lower than before. There may be some fundamental reasons for this, but they should not derail the overall investment thesis.

First, market turmoil may have slowed the pace of interest rate hikes in Japan. In fact, the BOJ’s deputy governor has already partially backtracked on the central bank’s aggressive message, saying the BOJ will not raise interest rates when the market is unstable.

In fact, yields on ten-year Japanese government bonds have fallen by around 0.2 percentage points in the past three weeks. However, they have only returned to the level seen in April and are still significantly higher than a year ago.

The BoJ may likely proceed more slowly than suggested at its July meeting. However, gradual tightening is still likely, especially as wages in Japan are picking up: real, inflation-adjusted wages rose in June for the first time in more than two years.

SMFG said the last two rate hikes in March and July would boost its net interest income by about 70 billion yen, equivalent to $475 million, in the current fiscal year ending in March. That’s about 7 percent of last year’s net profit. The bank said each 0.1 percentage point increase in interest rates across the entire yield curve could boost its net interest income by about 40 billion yen. Megabanks like SMFG, Japan’s second-largest bank, could particularly benefit from their broader deposit base.

Another possible consequence of the market turmoil could be that Japanese banks will have to sell their cross-holdings in other companies at a lower price. At the government’s urging, Japanese banks have already started to divest their large holdings in other Japanese companies. SMFG, for example, has sold its Toyota shares.

But short-term market fluctuations are unlikely to stop banks from unwinding such holdings, which have long dragged down their returns. SMFG holds nearly 1 trillion yen worth of stocks, or about 30 percent of its net assets. It aims to bring that ratio down to below 20 percent. The bank said it would meet its three-year plan to sell 200 billion yen, or $1.4 billion, worth of stocks ahead of schedule. It added that it would announce a new plan in its next earnings release in November. It has also repatriated some of the capital raised from those sales through buybacks.

SMFG’s return on equity has improved from 5.4% to 9.2% over the past three fiscal years, largely due to earnings growth. Net profit grew 88% over the same period, a similar pace to Mitsubishi UFJ Financial, Japan’s largest bank, and faster than Mizuho Financial. However, SMFG trades slightly cheaper relative to tangible book value than MUFG, and could potentially offer more upside.

After the decline, SMFG’s dividend yield of 3.2% provides sufficient downside protection. Distributions to shareholders through dividends and buybacks could likely increase as the company continues to reduce its share holdings. According to FactSet, the stock now trades at 0.96 times tangible book value, up from 1.08 last month. Better returns from higher interest rates and a leaner balance sheet could increase the multiple even further.

Japanese banks may no longer be popular with investors at the moment, but when the dust settles, megabanks like SMFG could shine again.

Write to Jacky Wong at [email protected]