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The Lowest Interest Rate Sensitivity: Citigroup or JPMorgan?

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Sep. 20 2016, Updated 8:05 a.m. ET

Interest rate exposure

Citigroup’s (C) interest rate sensitivity is the lowest among its peers (XLF). A parallel 100-basis-point increase in interest rates would add $2.0 billion to Citigroup’s revenues. This compares to a $2.4 billion increase for Wells Fargo (WFC), a $7.5 million increase for Bank of America (BAC), and a $3.0 billion increase for JPMorgan (JPM).

JPM’s net 100-basis-point change in interest rates would lead to a $3.0 billion increase in net interest income. Higher interest rates would be negative for Citigroup, as higher credit costs would likely offset gains in net interest income.

In 2Q16, JPMorgan had a loan portfolio worth $872 billion. By comparison, Wells Fargo had a loan portfolio of $951 billion, and Bank of America and Citigroup (C) had loans of $903 billion and $592 billion, respectively.

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Volatility in the financial markets

In June 2016, the United Kingdom voted to exit the European Union. This was followed by volatility in the financial markets and has led to the IMF (International Monetary Fund) reducing growth forecasts for the global economy. These factors have led to a deterioration in the outlook for future interest rate hikes.

So 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, thus resulting in higher profitability margins. But the Fed has retreated from its expected interest rate hikes, which has led to further margin pressures.

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