BAC would gain most from a rate hike
Bank of America’s earnings are extremely sensitive to interest rate changes. Low interest rates weighed on the bank’s top line in the third quarter, and the company is hoping the Fed will raise rates in December. Low interest rates translate to squeezed net interest margins for banks. Higher interest rates lead to higher net interest income for banks (XLF), thereby resulting in higher profitability margins.
Net interest income forms ~50% of the company’s total income and is one of the largest sources of revenues for the company. A 100-basis-point increase in interest rates would lead to a rise of $5.3 billion in Bank of America’s earnings, which many believe would lead to economic growth across industries.
In the third quarter, Bank of America reported net interest margins of 2.2%, four basis points higher compared to a year ago. In order to reduce the volatility of interest-sensitive items, the bank also restated its earnings under FAS91 starting this quarter. This also helps with peer comparisons.
Bank of America isn’t alone in its struggle to boost earnings without a lift from higher rates. Its decline in profits, despite loan growth, is similar to that of peers that have reported third quarter results including JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C).