X
<

Why Are Banks Eagerly Waiting for a Rate Hike?

PART:
1 2 3 4 5 6 7 8
Part 4
Why Are Banks Eagerly Waiting for a Rate Hike? PART 4 OF 8

How Much Would A Rate Hike Benefit Wells Fargo’s Margins?

Wells Fargo’s interest rate exposure

Wells Fargo has the largest loan portfolio among US banks (XLF). As of 3Q16, it has a loan portfolio of $957 billion. In comparison, peers (C) Bank of America (BAC) and JPMorgan Chase (JPM) had loans of $900 billion and $888 billion, respectively.

How Much Would A Rate Hike Benefit Wells Fargo&#8217;s Margins?

Interested in BAC? Don't miss the next report.

Receive e-mail alerts for new research on BAC

Success! You are now receiving e-mail alerts for new research. A temporary password for your new Market Realist account has been sent to your e-mail address.

Success! has been added to your Ticker Alerts.

Success! has been added to your Ticker Alerts. Subscriptions can be managed in your user profile.

In its latest 10Q filing, Wells Fargo measured the interest rate risk by simulating earnings under various interest rate scenarios. As you can see in the above table, if the federal funds rate moves lower to 0.25% or 1.6% from the current levels of 1.8%, Wells Fargo’s earnings would fall 2%–3%. However, if the federal funds rate moves higher to 2.1% or 5.3 from the current levels, its earnings would grow 0%–5%.

Similarly, Wells Fargo also created scenarios using the ten-year Treasury yield curve. If ten-year yields move lower to 1.6% or 2.5% from the current levels, its earnings would fall 2%–3%. However, if ten-year yields rise to 3.5% or 5.9% from the current levels, Wells Fargo’s earnings are projected to rise 0%–5%. A parallel rise in interest rates by 100 basis points would add $2.4 billion to Wells Fargo’s net interest income. It would lead to a rise of 5–15 basis points in its net interest margins.

In the third quarter, Wells Fargo’s net interest income grew 4% to $11.9 billion. It was driven by growth in earning assets and an extra day in the quarter. However, the net interest margin fell by 4 basis points from the previous quarter to 2.8% due to growth in long-term debt and deposits. During the quarter, Wells Fargo extended $70 billion in home loans—compared to $63 billion in 2Q16. However, Wells Fargo’s mortgage business had $1.7 billion in fees.

X

Please select a profession that best describes you: