Interest rate sensitivity
Bank of America is more sensitive to interest rate changes than J.P. Morgan. This is because it has a larger loan portfolio, and interest-related income makes up nearly half of its total income. A 100-basis-point change in interest rates would lead to a $6 billion increase in BAC’s net interest income, and net interest income comprises ~50% of the company’s total income, representing one of the largest sources of BAC’s revenues.
For J.P. Morgan (JPM), net interest income makes up 46% of total income. A 100-basis-point change in interest rates would lead to a $3 billion increase in J.P. Morgan’s net interest income.
Notably, Bank of America (BAC) and J.P. Morgan have one of the largest loan portfolios in the financial sector (XLF). In 2Q16, J.P. Morgan had a loan portfolio worth $872 billion. By comparison, Bank of America (BAC) had a loan portfolio of $903 billion, while Wells Fargo (WFC) and Citigroup (C) had loan portfolios of $951 billion and $592 billion, respectively.
Bank of America and J.P. Morgan aren’t alone in their struggle to boost earnings without a lift from higher rates. Their profit declines despite loan growth are similar to those of peers that have reported second quarter results including Wells Fargo (WFC) and Citigroup (C).
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 the 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.