For Bank of America and its peers, the low interest rates persisting since the financial crisis have hampered their profitability, restricting what they can earn on loans on other investments.
But here’s some good news for the Charlotte-based company: It stands to benefit more than its peers when interest rates start to rise, according to two bank analysts.
Deutsche Bank Matt O’Connor and Robert Placet, in a report issued this week to investors, wrote that an increase in interest rates could boost Bank of America’s profits by 20 percent this year. Last year, the bank’s profit dropped by 58 percent, largely because of a nearly $17 billion settlement with the federal government to resolve probes into mortgage practices.
When long- and short-term interest rates start rising, Bank of America will be “best positioned” to initially benefit from the increase compared with its peers, the analysts wrote.
One reason stems from Bank of America’s method of accounting for changes to long-term interest rates in its bond portfolio. That makes the bank’s quarterly results more sensitive to initial rate fluctuations compared with the results of its peers.
Last week, Fed Chairwoman Janet Yellen said there could be a “sharp jump” in long-term rates when the regulator raises short-term interest rates.
But it’s unclear exactly when the Fed will raise short-term rates, which it has kept near zero since the crisis in an effort to boost the nation’s economy. Some economist have speculated that the Fed could act in September.
For banks, low rates have been a double-edged sword. While they have reduced banks’ borrowing costs, they have also restricted how much interest banks can charge on their loans.
Low interest rates, among other factors, are also hurting Bank of America’s share price, according to the Deutsche Bank analysts.
The bank’s shares are down about 9 percent for the year, compared with a less than 1 percent rise in the KBW bank index, which tracks stocks of 24 large U.S. banks.