Secret winner: Why Bank of America is one of the biggest interest rate beneficiaries

by Ralf Witzler, Euro on Sunday

DThe banks have been waiting for this for a long time, and now the wish seems to be coming true. The turnaround in interest rates is coming. And it seems to be clearer than was foreseeable just a few weeks ago. Investors will be anxious to see how the financial institutions forecast future rising interest rates.

A winner of the turnaround in interest rates in the USA is likely to be Bank of America (BofA). It is one of the big players in the business of lending to business and private customers, and rising interest rates usually mean higher income for banks that make loans. The institutes act from a position of strength. They can pass rising rates on to borrowers without having to pay higher rates on customer deposits themselves.

So BofA has every reason to be optimistic. Model calculations show this very clearly. If interest rates rise by just one percent, both in the short terms and at the long end, this means higher income for BofA of around seven billion US dollars – a peak value even among the industry giants in the USA.

This is one reason for the analysts at Swiss UBS to raise their rating of BofA shares from “neutral” to “buy”. These are golden times for bank stocks, even if the sector has done quite well in the past.

Banks in demand in the crisis

Since the price slide at the beginning of the Corona crisis, the value of BofA securities has more than doubled and is now even higher than the price before the financial crisis. The significant increase in value rests on a solid foundation for several good reasons. First of all, the banks were part of the solution in the pandemic – very different from the financial crisis. They were in demand when the crisis began, for example, to keep companies liquid with loans and the granting of credit lines in order to avoid an economic collapse. The loans granted initially had to be secured with high provisions. But after the big wave of bankruptcies failed to materialize, BofA alone released more than $600 million in provisions in the summer, which not only brighten up the result, but can also be invested or distributed to the shareholders.

Broad growth

In addition, the pandemic has stimulated business with company takeovers and mergers, because companies are reorganizing due to the changes caused by the crisis. Overall, revenue in the third quarter jumped 58 percent year-on-year to $7.7 billion.

But even without the turnaround in interest rates and the pandemic, the bank is in good shape and is growing across the board as before the crisis, starting with the growing number of customer accounts through to the increase in assets under management in asset management.

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