Nearly all bank stocks stand to benefit when the Federal Reserve raises its benchmark federal funds rate, which will push up all other rates. That's because nearly all banks are asset-sensitive, meaning that when rates go up, more of their assets such as loans and securities will reprice higher than their liabilities such as deposits and borrowings.
While the current consensus is that the Fed won't hike rates until 2023 or 2024, Morgan Stanley CEO James Gorman recently said he could see it happening in early 2022. And even if the Fed doesn't hike rates in the near future, banks could still benefit from rising long-term rates, which have been climbing for most of this year.
While nearly all banks will benefit, some will benefit a lot more than others. Here are three to watch.
1. Bank of America
America's second-largest bank by assets, Bank of America (BAC -1.38%) probably cannot wait for the Fed to hike rates. The bank had more than $900 billion in loans and a roughly $850 billion securities portfolio at the end of the first quarter, both of which will benefit tremendously from a rate hike (and if the bank can find some modest loan growth).
According to Bank of America's latest quarterly filing, if the Fed were to raise the federal funds rate by 1 percentage point, the bank would realize an additional $8.3 billion in net interest income over the next 12 months. That's equivalent to roughly 19% of net interest income Bank of America made in 2020 and nearly 17% of net interest income made by the bank in 2019, which would be a huge boost to revenue.If the Fed doesn't increase the federal funds rate, but the market pushes up long-term interest rates like those on the 10-year U.S. Treasury Bond by 1 percentage point, Bank of America would realize a nearly $2.1 billion increase in net interest income over the next 12 months.
Bank of America CEO Brian Moynihan also said on the bank's recent earnings call that if long-term interest rates continue to tick up and there is some "modest" loan growth in the back half of this year, the bank could see net interest income increase by around $1 billion in the fourth quarter from the $10.3 billion the bank generated in the first quarter of this year.
2. Wells Fargo
Wells Fargo (WFC -1.30%), another U.S. megabank, also stands to benefit immensely in a rising-rate environment. Despite operating under a $1.95 trillion asset cap as punishment for its phony-accounts scandal, the bank still had an $873 billion loan book in the first quarter that was heavy in commercial and industrial loans, which are typically floating-rate loans that move up or down with rates. The bank also had a $511 billion securities book. A jump of 1 percentage point in the federal funds rate as of March 31 would lead to an additional $6.8 billion in net interest income.That would be equivalent to roughly 17% of the net interest income Wells Fargo made in 2020.If long-term rates move up half a percentage point from where they were on March 31, Wells Fargo could still realize an additional $1.3 billion in net interest income over the next year.
The rate hike would help Wells Fargo greatly after the bank saw net interest income fall by more than $7 billion between 2019 and 2020.
Much smaller than the two aforementioned megabanks, the nearly $85-billion-asset Comerica (CMA 0.38%), based in Dallas, is also very sensitive to short-term rates. The bank's $50 billion loan portfolio is very commercial-heavy, and the bank also has another $14 billion in investment securities. At the end of 2020, Comerica reported that more than $42 billion of its $47 billion loan portfolio at the time had floating interest rates.As a result, the bank reported that as of March 31, an increase of 1 percentage point in the federal funds rate would increase net interest income 9 percentage points over the next 12 months.