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Higher Interest Rates Will Be Better for BAC’s Earnings

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Bank of America’s sensitivity to interest rates

Bank of America’s (BAC) earnings are extremely sensitive to interest rate changes. Low interest rates weighed on the bank’s top line in 2Q16, and the company is hoping for the Federal Reserve to raise rates.

US banks started the year expecting four rounds of rate hikes, but things haven’t turned out in their favor. However, analysts assign a 79% probability to a 25-basis-point hike in interest rates at the upcoming September Federal Reserve meeting.

In 2Q16, Bank of America reported a net interest margin of 2.0%, 34 basis points lower than a year ago. Further, its net interest income fell by 15% to $9.4 billion.

Bank of America isn’t alone in its struggle to boost earnings without a lift from higher rates. Its fall in profits, despite its loan growth, has been similar to those of its peers JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C).

Bank of America has one of the largest loan portfolios in the financial sector (XLF). In 2Q16, it had a loan portfolio worth $903 billion. By comparison, Citigroup had a loan portfolio of $592 billion, while Wells Fargo had loans worth $951 billion.

This makes Bank of America’s earnings extremely sensitive to interest rates.

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