How Sensitive Is BNY Mellon To Fed’s Rate Hike Plans?

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 article captures the impact on Bank of New York Mellon (NYSE:BK). You can access our interactive model for BNY Mellon here. You can modify assumptions such as interest-earning assets, non-interest income, earnings multiple, forward P/E rate and others to see how sensitive BNY Mellon’s shares are to the Fed’s rate hikes.

We maintain a $55 price estimate for BNY Mellon’s shares, which is slightly below the current market price.

This is how BNY Mellon’s Key Metrics Change Based On The Number of Rate Hikes In 2018

The analysis above assumes that each 25 basis point (0.25%) rate hike by the Federal Reserve results in a 2.5 basis point (0.025%) increase in net interest margin (NIM) for BNY Mellon, which represents a sensitivity factor for the bank’s NIM figure of 10% (2.5/25).

Think the sensitivity factor, or other figures that are a part of our estimates are off? Create your own estimates by changing the inputs in our interactive model.

Why Does The Pace Of The Fed’s Rate Hike Process Matter To The Banks?

The U.S. banking sector has seen a notable improvement in interest revenues over the last few quarters, as the Federal Reserve has stuck to its plan of raising benchmark interest rates by at least three times each year over 2017-19 as of now. The regulator laid out its rate hike plan in late 2016, and given the upbeat outlook for the U.S. economy in the wake of the Tax Act, there is little reason to believe that the benchmark rate will not be raised thrice again in 2018.

However, as the Federal Reserve has ensured that key economic metrics including growth rate, unemployment rate and inflation are at acceptable levels before each interest rate hike, unexpected macroeconomic events could potentially derail the rate hike process. This is particularly true given the high level of dependence between the largest economies in the world – with a destabilizing event in a foreign nation eventually having a negative impact on the U.S. economy.

While the Fed’s decision to delay any rate hikes will affect all industries, the country’s banking sector would be hurt the most. This was already seen over 2014-15, when record-low net interest margin figures eroded profits across banks. As low interest rates limit the interest banks can charge on their loan portfolio, it weighs on their revenue figure.

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