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If I have a loan from a bank and I know that they do not sell their loans or the administration of said loans, is investing in their stock concentrating my portfolio risk?
Is there any reason to believe that the equity returns will be greater than the interest that I am paying them?
If I have a loan from a bank and I know that they do not sell their loans or the administration of said loans, is investing in their stock concentrating my portfolio risk?
Only if:
Unless you're a Large Corporate Borrower (in which case you wouldn't be asking us), item #2 means that your loan won't affect the bank's share price.
I don't see a measurable relationship between equity returns and your specific loan interest rates. You have to analyze them independent of each other.
Regarding equity returns, if you are talking about dividends, you can go check the trailing yield of the shares. But, dividend yield (if at all any) will be much lesser than the loan interests in general. If you consider capital gains, then you have to analyze the stock in-depth. And, never forget to factor in taxes.
There are analogies in corporate finance which compare equity to a long call option, and debt to a short put.
If you a long an at the money call (long stock) and long an at the money put (debit), you create a synthetic position in the underlying assets called a "straddle". When a bank loans someone money, it is essentially short a put (no upside beside recurring interest; risk of principal loss).
In theory, a straddle is less risky than buying the stock outright because you have some downside protection in case things goes against you.
Therefore it should be less risky to buy the stock of your lender than to buy stock outright. You are exposed to the bank's upside, but it is exposed to your downside.
For example, no matter how the bank performs, your debt will be no better or worse off -- the interest payments are not likely to change. If you do well, then the bank is not able to participate in your upside aside from lowering its default risk (which should in theory already be reflect in your rates). If you do poorly while the banks does well, then it finances your losses with their equity capital appreciation.
This is, of course, an oversimplification. There are other risk factors not captured by this specious analogy — e.g., counterparty risks in the case your debt is “callable”.
