When Bank of America (NYSE:BAC) reports earnings next Tuesday, analysts and commentators will be on the lookout for one thing in particular, beyond profitability: evidence that higher interest rates are boosting the bank’s top and bottom lines.
The Federal Reserve’s move to raise interest rates at the end of last year should be good for banks. According to a recent report from SNL Financial:
Some of the biggest lenders could also show early stage benefits from modestly higher short-term interest rates. Federal Reserve policymakers in December boosted rates by 25 basis points, lifting them off of a zero-bound range and marking the first hike since prior to the 2008 financial crisis. Analysts say some borrowers inevitably moved before December to lock in loan deals prior to the widely anticipated rate move, and that may modestly benefit some banks’ fourth-quarter lending levels.
Richard Davis, chairman and CEO of U.S. Bancorp (NYSE:USB) made a similar prediction on the bank’s third-quarter conference call last year. Deposits will flee in search of higher yields, noted Davis, and commercial customers will rush to lock in low rates before missing the opportunity to do so:
We’re all going to have to get ready for this moment when deposits start to flow out of banks, and we should celebrate it, right? [Customers] are back up to a savings level now that hasn’t been seen in 12 years. That’s great for America, but now we want them to use [their deposits]. … Secondly, lines of credit that are already extended but not used — get used, and then eventually new lines and loans start to happen. That’s how the cycle reverses itself.
There’s already evidence that Davis’ forecast is coming to fruition.
Soon after the Fed’s move, multiple banks — including Bank of America, Wells Fargo (NYSE:WFC), U.S. Bancorp, and M&T Bank — increased their prime rates. This is a key reference rate that filters through to other borrowing costs, including credit card loans and mortgages, among others.
To put the move into context, it was the first time U.S. Bancorp had changed its prime rate since the end of 2008, when it was decreased by 75 basis points to 3.25%. It inched that up by a quarter of a percentage point on December 16, 2015, as did Bank of America and Wells Fargo.
Because a higher prime rate fuels a bank’s net interest income, and thus revenue, it’s widely assumed that lenders across the industry will make more money starting immediately — though, to be clear, there are offsetting balance sheet implications that you can read about here.
The change in rates will have come as a relief to Bank of America in particular, as it’s struggled since the crisis to bring its revenue in line with its better-heeled peers like Wells Fargo and U.S. Bancorp. That’s why analysts and commentators will be looking at this point so closely when Bank of America reports earnings on Jan. 19.
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John Maxfield owns shares of Bank of America. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: short January 2016 $52 puts on Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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