Bank of America’s Stock Looks Less Sensitive To Fed Rate Hikes Than Peers

Late last week, the President of the San Francisco Federal Reserve Bank, John Williams, hinted at the possibility of four rate hikes in 2018. It is largely assumed that the Fed will hike rates three times this year, but Williams argued that upbeat wage growth and inflation figures coupled with expected short-term gains from the new tax regime may warrant an additional rate hike. While rising interest rates are largely considered a negative for most industries, the U.S. banking sector will be one of a few industries that will see a sizable benefit from more rate hikes.

The Fed’s rate hike process has helped U.S. banks gradually improve their net interest margin (NIM) figures steadily over recent years – helping this key operating metric up from the record-low figures seen over 2014-15. However, gains for all banks have not been uniform, with some banks reporting a sharper improvement in NIM figures compared to others. This difference can be attributed to the fact that the banks have different loan-to-deposit ratios, and hold interest-bearing and non-interest-bearing deposits in different proportions. Further, they generally focus on different types of loans compared to others (with unsecured loans like card balances and personal loans demanding a higher interest rate compared to secured loans like mortgages and commercial loans)

To understand how the Fed’s rate hike process directly impacts the financial performance of the largest U.S. banks, we have created a series of interactive models that quantify the gains or losses in these banks’ share price, revenues and profits based on whether or not the Fed follows through on its plan to hike interest rates three times in 2018. This analysis captures the impact on Bank of America (NYSE:BAC). You can access our interactive model for Bank of America here. You can modify assumptions such as interest-earning assets, non-interest income, earnings multiple, forward P/E multiple and others to see how sensitive Bank of America’s shares are to the Fed’s rate hikes.

We maintain a $32 price estimate for Bank of America’s shares, which is around the current market price.

How Bank of America’s Key Metrics Change Based On The Number of Rate Hikes In 2018

We estimate that each 25 basis point (0.25%) rate hike by the Federal Reserve would result in a 5 basis point (0.05%) increase in net interest margin (NIM) for Bank of America, which represents a sensitivity factor for the bank’s NIM figure of 20% (5/25). Notably, this compares to a much higher sensitivity factor of 50% for peers Wells Fargo and Capital One.

While all banks are expected to benefit from each rate hike, the lower sensitivity factor for Bank of America implies that the diversified banking giant will see its operating metrics benefit to a lower extent than Wells Fargo and Capital One. Accordingly, the latter two banks would likely see greater gains should the Fed actually raise rates four times in 2018.

Want To Understand How The Fed’s Rate Hike Will Affect The Performance Of Other Major U.S. Banks?

Click on the links below to know more about:

• Wells Fargo’s Sensitivity to Fed’s Rate Hikes
• Capital One’s Sensitivity to Fed’s Rate Hikes
• BNY Mellon’s Sensitivity To Fed’s Rate Hikes

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