In the second quarter, Bank of America (NYSE:BAC) reported a significant increase in net interest income. It is common knowledge that rising interest rates tend to benefit banks. As the Federal Reserve attempts to combat inflation by increasing its moving average overnight lending rate, the federal funds rate, banks receive a boost as the yields on many existing and new loans also rise.
If banks can effectively manage their deposit costs, their margins increase. Banks’ current interest rate environment is the most rapidly rising since the Great Recession, and additional rate hikes are expected this year. As a result, the majority of banks are currently licking their lips. Few banks profit as much from rising interest rates as Bank of America (NYSE:BAC), whose loan revenue is about to skyrocket. The justification is as follows.
Net Interest Income Is Projected to Soar
Net interest income (NII) is the profit banks earn on loans, securities, and cash after deducting the cost of funding these assets. NII is a significant source of revenue for the majority of banks. In the second quarter, when the Federal Reserve raised the federal funds rate to 1.5% to 1.75 %, Bank of America (NYSE:BAC) began recognizing the positive impact on NII.
After three consecutive quarters of steady improvement, Bank of America’s net interest income (NII) increased by nearly 7 % from the first quarter of this year, and the company’s management predicts further growth. Alastair Borthwick, the chief financial officer of Bank of America (NYSE:BAC), stated on the bank’s earnings call for the second quarter that management anticipates NII to increase by an additional $900 million to $1 billion in the current quarter, assuming the modest loan and deposit growth and assuming deposit costs remain stable. Borthwick added that the bank anticipates fourth-quarter NII growth to be even greater.
The majority of this NII expansion should flow to the bottom line, according to Borthwick. One analyst inquired on the call if the bank could end the fourth quarter with a $15 billion NII run rate. Borthwick did not say no; instead, he stated that it was too soon to tell. There are still many unanswered questions, such as what the federal funds rate will be at the end of the year and how loan growth might develop, particularly if the U.S. economy enters a downturn.
The opposite side of the NII equation is deposit costs, as banks are eventually forced to pay customers more for their deposits when interest rates rise. Bank of America (NYSE:BAC) has significantly increased its deposit base by adding non-interest-bearing customer deposit balances, which cost the bank almost nothing and tend to remain in a rising-rate environment for a more extended period of time. The bank’s customer deposits have now surpassed $1 trillion.
There will be an increase in deposit fees, and this is a very intense rate environment. However, Bank of America (NYSE:BAC) has significantly expanded its deposit base over the past few years, which should aid the NII cause.
Bank of America: Expectations
If Bank of America (NYSE:BAC) concludes the final quarter with an NII run rate of $15 billion, the company will be on track to generate $60 billion in NII in 2023. In context, this would be an increase of more than $17 billion compared to the bank’s 2021 revenue. There are still a number of variables in play, such as the ultimate direction of interest rates, loan growth, and the economic climate. But rest assured, NII should explode in the upcoming quarters, which is good news for shareholders.
As stated on BAC’s website, “Bank of America is one of the world’s leading financial institutions, serving individuals, small- and middle-market businesses, large corporations, and governments with a full range of banking, investment management and other financial and risk management products and services.”
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