This week, the Federal Reserve will once again consider whether to raise its benchmark short-term interest rate for the first time since the regulator slashed it during the recession.
With expectations for an increase rising, some longtime Bank of America shareholders might be hoping a hike will boost the Charlotte bank’s stock price, which remains below its prerecession levels.
Bank have been complaining, after all, that low interest rates are hurting their net interest margins, a key measure of profitability.
But some analysts who closely follow Bank of America believe the Fed’s first increase in the federal funds rate will likely be a non-event for the stock’s price.
That’s because the stock prices for Bank of America and other banks already reflect investors’ expectations for a quarter percentage point interest rate increase, analysts say.
That argument makes sense. After all, Federal Reserve officials have been signaling this year that they might raise short-term interest rates in December. In testimony this month before a congressional committee, Fed Chairwoman Janet Yellen indicated economic conditions necessary for a rate hike have been met.
Independent bank analyst Nancy Bush describes it as the “most-telegraphed” rate increase in the Fed’s history. Like Marty Mosby, an analyst with Tennessee-based Vining Sparks, Bush told me a quarter percentage point hike has already been factored into banks’ stock prices.
“The action of the bank stocks on Wednesday is likely to be a big fat nothing,” Bush said.
It’s widely expected the Fed will raise the federal funds rate by only one-quarter of a percentage point, if it takes any action, when its policy-making body convenes for a two-day meeting that begins Tuesday. Since 2008, the rate has been near zero, a record low, when it was cut to help the U.S. economy recover.
Higher interest rates are expected to benefit banks, whose profitability has been squeezed by low interest rates.
Once rates rise, experts say you can expect to see banks charge higher interest rates on certain loans, while waiting to increase what they pay you and me for deposits. That is expected to improve banks’ net interest margins.
Analyst Dick Bove of Rafferty Capital Markets is among those leaning toward a rise in Bank of America’s stock price when the Fed raises interest rates.
A quarter of a percentage point increase could drive Bank of America’s stock price above $18, Bove said. On Monday, the bank’s shares closed at $16.80.
Certainly, many Bank of America shareholders would welcome a higher stock price. At the bank’s annual shareholders meeting in May, more than one shareholder complained to CEO Brian Moynihan that the price of the bank’s shares remains a long way from the peak of more than $54 in 2006.
Of the four largest U.S. banks by assets, only Bank of America and Citigroup have yet to see their stock prices return to prerecession levels.
For the year, Bank of America’s stock is also under-performing its peers. The bank’s shares are down more than 7 percent, according to the KBW Bank Index, which tracks share performance of 24 large U.S. lenders.
The index is down by about 4 percent this year.