Will BofA (BAC) Actually Benefit from the Fed’s Rate Hike?

The Federal Reserve will most likely announce a rate hike later this week. Most investors anticipate that Bank of America Corporation BAC, being one of the largest U.S. banks, will certainly gain from this move.

Since the beginning of 2015, we have been expecting the Fed to raise interest rates. Every time such news made headlines, investors’ optimism toward banking stocks grew. Nevertheless, many domestic and global concerns were posing as hindrances in the Fed’s way of increasing the rates.

But this time, all eyes will be on the Fed’s policy meeting, to be held on Dec 15 and 16. Positive comments from the Fed Chair Janet Yellen, along with the improving U.S. economy, indicate that a rate hike is indeed in cards.

Nonetheless, the rate-hiking cycle will be gradual and the frequency will depend exclusively on the performance of the U.S. economy. So the borrowing costs for consumers and businesses are not expected to rise significantly in the near term.

Reality Check for BofA

According to market rumors, BofA stands to benefit substantially from a rise in rates. As net 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 BofA, as per its latest quarterly filing with the Securities and Exchange Commission, paints a different picture.

Estimated Net Interest Income Excluding Trading-related Net Interest Income (Dollars in millions)
Curve Change	Short Rate (bps)	Long Rate (bps)	30-Sep-15
Parallel shifts
+100 bps instantaneous shift	100	100	4,534
-50 bps instantaneous shift	-50	-50	(3,814)

Source: Bank of America 10-Q (Sep 2015-ended)

We can see that over the next 12 months, a 100-basis points (bps) rise in short rates will lead to a $4.5-billion rise in BofA’s net interest income (excluding trading-related net interest income). Hence, on a quarterly basis, considering a 25-bps rise in rates, the company’s net interest income is projected to inch up a mere $0.3 billion. This will translate into 1.4% of net revenue for the three months ended Sep 30, 2015. Will this much gain in revenues be adequate for the stock to rise considerably?

Notably, this is the case with most big banks including JPMorgan Chase & Co. JPM, Wells Fargo & Company WFC and Citigroup Inc. C. So before you pick a bank stock, expecting it with to gain substantially post the rate hike, it will be prudent to check the interest rate sensitivity of the bank’s revenues.

Currently, BofA carries a Zacks Rank #3 (Hold).

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