End of near-zero rates era
After the economic fallout of 2007, the US Fed kept rates near zero for a long period in an effort to boost economic and corporate-level spending to avoid further declines in growth rates. Commercial banks (XLF) were operating with lower net interest margins, though over a period of time, loan books expanded as risk taking capacity returned among corporates and retail clients.
Then, the Fed raised interest rates for the first time in 4Q15, though only by 25 basis points, triggering a fall in stocks for an interim period but ultimately bringing about a second hike one year later in 4Q16. The Fed raised rates again in 1Q17 and is expected to do the same at least two more times this year—in June and December.
These rising interest rates have helped commercial banks command higher margins. Average NIMs (net interest margins) are expected to rise further in 2H17, but the Fed might not enact another hike in 2018—unless the European Central Bank starts raising its zero-level interest rates.
Yields on various offerings
Meanwhile, Bank of America’s (BAC) yields on offerings such as residential mortgages, home equity, US credit cards, consumer loans, and other loans have increased over the past year. The rise has been partially offset by declines in yields on non-US credit card balances.
The banking giant commanded an average yield of 2.96% on its total earnings assets of $1.9 trillion in 1Q17, as compared to 2.88% on $1.84 trillion in 1Q16.
This rise in earnings assets might slow down marginally in coming quarters, but BAC’s yield is expected to rise at a continued pace, thanks to rising interest rates. Notably, peers J.P. Morgan (JPM) and Citigroup (C) are seeing similar growth trends, while Wells Fargo (WFC) has seen stable NIMs in recent quarters.