Bank of America's Profits Caught Between the Fed and 10-Year Treasury
June 15 2017 - 11:28AM
Dow Jones News
By Rachel Louise Ensign
Rising interest rates are good for banks. A flatter yield curve
isn't.
That was the dilemma faced by banks as the Federal Reserve again
raised interest rates Wednesday. The Fed is now targeting
short-term rates of between 1% and 1.25%.
Yet longer-dated rates have fallen of late; the yield on the
10-year U.S. Treasury hit 2.11% at one point Wednesday. On Thursday
it was at 2.16%.
The result is compression between short- and long-term rates.
The spread between yields on 10- and two-year government debt has
fallen in recent days to 0.81 percentage points. That is not far
off levels experienced last summer, which were the lowest in five
years. At its peak in this period, in late 2013, the spread was
2.61 percentage points.
A flatter yield curve threatens to pinch bank profits, even as
the Fed's move to end nearly a decade of near-zero rates promises
to help bolster them.
Bank of America, the second-largest U.S. bank by assets,
illustrates the challenge. The bank is seen as the big bank that
will benefit most from higher rates. Investors often buy and sell
the lender's stock on rate expectations.
The Fed's increases, which began in December 2015, have helped
lift the bank's profits broadly. Notably, it has helped to relieve
pressure on the bank's net-interest margin, a measure of the profit
the bank generates from borrowing money and then lending it
out.
While the bank has been able to charge more for some loans, it
has been able to hold steady the rates it pays for deposits. That
bolsters its net-interest margin.
Last year, Bank of America paid an average of 0.08% for its
interest-bearing deposits in the U.S. That rate has barely budged
since then. Despite this, Bank of America kept raking in customers'
money; such deposits increased $33 billion versus 2015.
"We are doing better than our models would have said" on how
quickly the bank would have to increase deposit rates, Bank of
America CEO Brian Moynihan said in late May.
In the first quarter, higher rates helped lift net interest
income by more than $700 million.
Over time, though, the bank and others are likely to have to
increase the amount it pays to depositors. That will lessen some of
the benefit from rising short-term rates.
The bigger problem: The recent reversal in long-term rates means
Bank of America, like other banks, earns less on its massive
investment portfolio. When those rates fall, banks reinvest
maturing securities at lower rates.
So, in late May, Bank of America cut its expectations for growth
in net interest income for the second quarter, saying lower rates
would reduce a previous forecast of about $150 million by at least
$30 million.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
(END) Dow Jones Newswires
June 15, 2017 11:13 ET (15:13 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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