How Bank Of America Corp (BAC) Can Make The Most Of Interest Rate Hikes?


Bank of America Corp (NYSE:BAC) was one of the financial companies that struggled the most in recent years with the financial crisis, and legal woes stunting investor perception. With higher rates, there is strong hope that the time has come for the stock to deliver better returns in the coming years. There are reasons to have such an opinion. The Federal Reserve hiking interest rates should help the bank, as well as, the entire banking industry. The hike comes nearly after nine years since the last hike in 2006. The financial institution has been clamoring for an interest hike for a long time, and the absence of it has hurt the sentiments. Now, let’s look at how the interest rate would benefit the company.

More Interest Hikes In The Cards

Bank of America Corp (NYSE:BAC) increased its lending rates immediately after the Federal Reserve announced its much-awaited key interest hike last week. Though the increase is only 25 basis points, it signaled a significant shift in the policy makers’ mind. Nearly three-fourth of people were expecting the interest increase after the Fed gave a pause in September citing the global conditions. At that time, the meeting came on the back of China reporting a slower growth in the economy than expected. Also, the fear was that the move would only strengthen the USD. However, policy makers allowed different nations to evolve policy in respect of the global economic conditions.

Bank of America Corp (NYSE:BAC) and for that matter, other banks are also counting upon the estimated interest rate hike in the coming quarters. There is the expectation that the Central Bank would boost at least 75 basis points in interest rates before the next year ends. That would likely be done in three phases with 25 basis points each. Therefore, the total interest rate hike would likely be a minimum of one percentage point by the end of the year 2016. That is a significant thing considering that the rates were cheaper at 25 basis points only until recently. As a result, the likely interest rate would be about 1.25% before the next year, if that holds true.

Gains From Rate Hikes

The increase in interest rate will result in higher interest income and also boost the net interest margin. There will be a delay before consumers see higher rates in their checking and savings accounts while banks are quick to pass on the hike to borrowers. Bank of America Corp (NYSE:BAC) has already indicated in its presentation of third quarter earnings how it would benefit from the interest rate hike. The bank estimated that for every one percentage point of interest rate hike, it would gain approximately $4.5 billion a year. At the current rate increase level, the company stands to gain a minimum of $1.25 billion next year. The next rate hike may be possible only by March or so. Therefore, effectively, any hike, if announced, could have its implications only the rest of the period of the next year.

If the Federal Reserve announces another 25 basis points before March, Bank of America Corp (NYSE:BAC) is likely to gain a total of more than $1.8 billion in the nine-month period. That would result in gains to yearly income of over $2.1 billion. However, if the Fed opts to boost its interest rates later in June, its gain might be more than $1.8 billion for the calendar year. The company is not likely to gain all the $4.5 billion next year since the hike would come only at a staggering phase. The maximum that the bank could gain is between $2.7 and $3.0 billion from an interest rate hike next year. The following year could see a net gain of $4.5 billion.

Other Factors

Earlier this year, Bank of America Corp (NYSE:BAC) received conditional approval for its resubmitted capital return program when the Central Bank was running its stress tests. Recently the bank received approval of the Fed for capital return plan. 2016 could be an even more lucrative year as the bank earned even more and distances itself from it’s troubles. Also, the bank enjoys the number one status as far as market share was concerned in its footprint and was ranked first in eleven of the top 30 MSAs in deposit market share. Its operating cost per $100 of deposits was also said to be the lowest. Similarly, the company was ranked as number two in direct-to-consumer mortgage and number one for mortgage origination satisfaction.

Credit Quality

Bank of America Corp (NYSE:BAC)’s credit quality was strong at the end of the September quarter as its net charge-offs were dipped to $715 million from the year-ago quarter’s $815 million. At the end of the third quarter in 2011, it was $2.32 billion. That suggested that it did well to improve its credit quality during the period. Similarly, its expenses in consumer banking dipped to $13.1 billion for the nine-month period ended September from $13.4 billion during the same period in the previous year.

Deutsche Bank was also impressed with Bank of America Corp (NYSE:BAC)’s focus on providing low-cost products for its mass market consumers, as well as, for credit cards. As a result, its earnings were predicted to be less volatile than its rivals. The company also reduced its risk in its loan portfolio apart from the exposure to trading and sales.

Conclusion

The stock was not performing as expected for one or the other reason. However, that could be set to change in the next year. In fact, Bank of America Corp (NYSE:BAC) could be one of the stocks that might offer strong returns due to a combination of factors like interest rate hike, control over expenses, capital return program, and growth in deposits. The year ahead could be a banking year, and BAC is likely to be one among them.

Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.

Viraj Shah

Viraj Shah has completed M.Com (Finance) and is currently pursuing his CFP. He tracks US markets along with other global markets like India very closely. He is very passionate about stocks, real estate, and technology. He also believes that money can always be made in the market.

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