The Federal Reserve will most likely announce a rate hike next week. Most investors expect that JPMorgan Chase & Co. JPM being one of the largest banks will definitely benefit from this move.
Since the beginning of 2015, we have been anticipating the Fed to increase interest rates. Every time such news made headlines, investors’ optimism toward banking stocks grew. However, several domestic and global concerns were stopping the Fed from raising rates.
But this time, all eyes will be on the Fed’s policy meeting, to be held during Dec 15–16. Positive statements from the Fed Chair Janet Yellen, along with the improving U.S. economy, indicate that a rate hike is indeed in the cards.
Nonetheless, the rate-hiking cycle will be gradual and the frequency will solely depend on the performance of the U.S. economy. So the borrowing costs for consumers and businesses are not expected to significantly increase in the near term.
Reality Check for JPMorgan
According to market rumors, JPMorgan stands to benefit substantially from a rise in rates. As interest income is one of the largest sources of revenue for the company, investors are undoubtedly excited about the hike in rates.
However, the interest rate sensitivity of JPMorgan presented in its latest quarterly filing with the Securities and Exchange Commission depicts a different picture.
We can see that over the next 12 months, a 100-bps rise in rates will lead to a $3-billion increase in JPMorgan’s net interest income (excluding the impact of CIB’s markets-based activities and MSRs). So, on a quarterly basis, considering a 25 basis points (bps) rise in rates, the company’s net interest income is projected to inch up merely $0.2 billion. This indicates 0.8% of total net revenue for the three months ended Sep 30, 2015. Will this much gain in revenues be able to help JPMorgan stock gain significantly?
Notably, this is the case with most big banks including Bank of America Corporation BAC, Wells Fargo & Company WFC and Citigroup Inc. C. So before you pick a bank stock with an expectation to gain significantly post the rate hike, it would be prudent to check the interest rate sensitivity of the its revenues.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).
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