Interest Rate Sensitivity: Citigroup versus Bank of America

Citigroup’s interest rate sensitivity is the lowest among its peers. A parallel 100-basis-point increase in interest rates would add $1,984 million to Citi’s revenues. This compares to a $7.5 million increase for Bank of America, $3 billion for J.P. Morgan, and $2.4 billion for Wells Fargo. Higher interest rates would thus be negative for Citigroup, as higher credit costs would likely offset gains in net interest income.

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

Last month, Great Britain voted to exit the European Union. This was followed by volatility in financial markets and has led to the IMF cutting down growth forecasts for the global economy. These factors have led to a deterioration in the outlook for future interest rate hikes. Therefore, interest rates will likely be lower for longer. This translates to squeezed net interest margins for banks. Higher interest rates lead to higher net interest income for banks thereby resulting in higher profitability margins. However, the Fed has retreated from its expected interest rate hikes, and this has led to further margin pressures.