Bank of America CEO: Fed rate hikes could boost bank profits by a 'billion dollars-plus'
Bank of America (BAC) CEO Brian Moynihan says the Federal Reserve's dramatic interest rate hikes will positively influence the bank's profits headed into 2023.
"One of the things that people know about banking is a core way we make half our money or more is through what they call a spread, i.e. the difference between what we lend a customer money at and what we pay on the deposits, and the money customers give us or we can borrow on the market," Moynihan said on Yahoo Finance Live (video above). "And that margin had been compressed dramatically as rates fell, and so it expands back out, getting to a more normal level, which it usually is, and that has shown a rapid increase in net interest income, NII improvement, over the last year."
"Going forward," Moynihan added, "we told our shareholders earlier this week that we'd expect another billion dollars-plus increase from the third quarter to the fourth quarter."
The Federal Reserve has hiked interest aggressively in 2022 to stomp out consumer inflation hovering around 40-year highs.
At a range of 3% to 3.25%, the federal funds rate is at its highest level since early 2008. Many economists think the Fed will hike rates at least three more times consecutively through 2023 and end its latest tightening cycle with rates close to 5%.
That could materially boost profits at banks such as Bank of America (BofA), provided a recession caused by slowing consumer spending doesn't ensue.
The effect of higher rates already started to play out in BofA's third quarter, which sent the stock price higher on Monday and Tuesday.
BofA's third quarter net interest income — known as NII on Wall Street — surged 24% year over year in the third quarter to $13.8 billion.
"The quarter highlights the earning power of the franchise as it benefits from the tailwinds of higher short-term rates," JP Morgan analyst Kabir Caprihan wrote in a note to clients. "The environment is expected to remain supportive for at least the next couple of quarters given how low deposit betas and NCO are currently."
Caprihan reiterated a Buy-equivalent Overweight rating on Bank of America stock.
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Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.
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