FED Should Hike Rates, according to Bank of America Corp (BAC)

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Bank of America Corp (NYSE:BAC) stock gained significantly on Wednesday after its CEO, Brian Moynihan, aired his views that the Federal Reserve should hike the Interest rates when they meet in June. It was not the only stock to gain, but other stocks from the banking also advanced. That showed two things clearly. One is that the pressure is mounting on the Central Bank to lift the interest rates at least in the upcoming meeting as it missed to do it in March itself. The other is the confidence in the current economic conditions and the market warranting such an interest hike. It is quite obvious that investors too started believing that the time is ripe for such an action though opinion might always differ as some started expecting it in September only.

Growing Opinion For Rate Hike

Bank of America Corp (NYSE:BAC) CEO interview to the media on the interest rate is a testimony to the sufferings that the banking industry had to undergo in the last eight years. CME Group’s FedWatch indicated that there was only 15% chance of an interest rate hike in the June meeting. The number might sound small for everyone, be it investors or analysts. However, the key factor is that it was only somewhat 4% at the beginning of the week. That is a drastic change of opinion within a short period of time. The economic factors too contributed to such a change in the thinking.

Bank of America Corp (NYSE:BAC) could use CPI as a tool to seek interest rate hike. That is because the CPI grew 0.4% in April, which was ahead of the expectations since it recorded only 0.10% in March. Analysts expect the acceleration to continue and play a key role in the decision-making of the central bank. Another factor in support of the economic condition is that housing starts in April grew thus recovering most of the drop recorded in the preceding month. There is a sense of belief that there would not be any changes in the current pace in the housing segment. Also, the home improvement retailers have reported higher than the expected numbers for the first quarter indicating that the consumers are spending and not remain on the sidelines.

Banks Bat For Rate Hike

Bank of America Corp (NYSE:BAC) see the change of mindset of late following the better than expected economic conditions and some of the corporate earnings. The banking industry has been pining for a rate hike for a long time, and that came in December last year. At the commencement of the current year, there were hopes among the bank management that the Fed would hike the interest rate three or four times with 25 basis points increase every time in the current year. Therefore, there was an initial expectation that the Fed would hike in March, and that did not happen due to the chaos in the rest of the world market conditions.

Now that the air is clear, Bank of America Corp (NYSE:BAC) is pushing for a rate hike in June and did not want to wait until September. Its CFO, Paul Donofrio, commented during the Barclays Select Franchise Conference that if interest rate hiked quickly, then it would help its returns to the shareholders. In the absence of the rate hike, he said that it was executing changes to compensate the low rates. In fact, its CEO said that it has been doing it for twenty-odd quarters now. In any case, Donofrio admitted that the company would gain from a normal rate market conditions if the Fed opts to boost rate next meeting.

Importance Of Rate Hike

Last year itself, Bank of America Corp (NYSE:BAC) CEO said that 100 basis points rate hike meant that it would gain $4.5 billion a year as revenue. Until now, only 25 basis points rate hike has been announced, which meant that it stands to gain $1.125 billion in the current year based on the calculations of Moynihan. Therefore, any additional announcement of the rate hike would be addition gain in terms of revenue. For instance, one more 25 basis points in June meant that it would gain about $560 million for the remainder of the current year. Another 25 basis points in September would mean that the bank would benefit about $280 million

In all, Bank of America Corp (NYSE:BAC) could gain as much as $840 million if the Federal Reserve opted to boost the rate hike in June and September. That’s why its CEO Moynihan acknowledged the importance of the rate hike. He did express his opinion that the company would have to face tough market conditions to match the performance targets if the Central Bank failed to boost the rates as planned. However, the bank expressed the confidence that it would still be able to match its objective without elaborating it further. He also responded saying that it would be left with no alternative but to focus on reducing costs. Also, there will be a threat of job cuts if the Central Bank failed to hike rates in the current year as BAC already slashed 3% of its staff in the first quarter.

Conclusion

Bank of America Corp (NYSE:BAC) is the only stock that is struggling to come out of the aftermath effect of the financial crisis though it cleared most of the mess. The stock continued to be available at cheap compared to the other three big banks of the United States. Also, the stock possess less risk since the bank has paid out or made provision for most of the litigation’s charges in respect of the crisis. Therefore, it stands to gain the most among the four big banks in the America if the Fed decides to hike the interest rates. The lower stock price provided significant potential for appreciation.

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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