Interest rates are one of the most important catalysts for bank stocks right now, with higher rates promising improved profitability throughout the industry. Given that the Federal Reserve will meet next week to decide whether to raise rates, in turn, it's worth reviewing JPMorgan Chase's (JPM 0.31%) latest interest rate sensitivity analysis.
Every quarter, large banks update investors on the impact to their top lines in the event that interest rates rise or fall. JPMorgan Chase does so in a table on page 75 of its second-quarter 10-Q. In it, the nation's biggest bank by assets lays out four different scenarios. The first assumes that interest rates rise by 100 basis points, or 1 full percentage point. The second assumes that rates rise by twice that, or 200 basis points. The third and fourth scenarios do the same thing, though they presume a decline in rates.
|
Scenario |
Impact on Net Interest Income |
|---|---|
|
+ 100 bps |
+ $2.2 billion |
|
+ 200 bps |
+ 3.6 billion |
|
- 100 bps |
- $4.5 billion |
|
- 200 bps |
Not material |
Bps = basis point. Data source: JPMorgan Chase.
The best outcome for JPMorgan Chase is if rates increase by a large amount. If they climb 100 basis points, it'll see its annual net interest income climb by $2.2 billion. If they rise by 200 basis points, meanwhile, it'll make $3.6 billion in added annual net interest income.
Just the opposite is true if rates drop. The impact is more severe, in fact, with a 100-basis-point decrease translating into a $4.5 billion drop in annual net interest income at the New York City-based bank. And because short-term rates -- namely, the fed funds rate, which is the primary short-term interest rate benchmark in the United States -- is at only 1%, it isn't possible for them to drop by the more extreme amount.
Image source: Getty Images.
To be clear, there's no telling for sure if the Fed will raise short-term rates at its meeting next week. By all indications, in fact, it won't, with CME Group's FedWatch Tool showing a 98.6% probability that rates will stay where they are.
The further out one goes, however, the more likely it is that the Fed will in fact do so. Following the central bank's meeting at the end of the year in December, there's a slightly better than even chance that short-term rates will inch an additional 25 basis points higher, according to CME Group's analysis.
Either way, whether the Fed raises rates next week or not, it's safe to say that bank investors stand to profit from a rising-rate environment regardless of when the Fed decides to push rates higher.
