Shares of Bank of America (NYSE:BAC) are down by more than 3.6% roughly halfway through the trading session on Thursday.
While there's no clear catalyst for the drop, the two most likely causes seem to be China's decision to devalue its currency last week, as well as new indications that the U.S. Federal Reserve is tempering expectations about an imminent increase in interest rates.
I've noted before that the devaluation of the yuan will have little immediate effect on Bank of America's bottom line. Although the nation's second biggest bank by assets does have operations in China, its aggregate exposure to the Asian country is $12 billion.
This is a lot of money, to be sure. But the likelihood that Bank of America would lose all of it even in the midst of a severe economic contraction in China seems dubious, as collateral underlying the loans would help offset losses from default.
Additionally, Bank of America has $244 billion in shareholders' equity, as well as large loan loss provisions, both of which are more than enough to absorb any charge-offs that materialize -- which, for the record, are still speculative.
The bigger impact can probably be traced to the recently released minutes from the Federal Reserve's Federal Open Market Committee, published yesterday. They suggest that the central bank has adopted a more cautious approach to raising interest rates than previously assumed.
The minutes reflect that "almost all members" of the committee responsible for setting monetary policy in the United States "indicated that they would need to see more evidence that economic growth was sufficiently strong" before they'd be willing to raise the Fed funds rate, which determines how much it costs banks to borrow each other's excess reserves on an overnight basis.
It's been presumed for much of the past year that the Fed will raise its benchmark Federal funds rate before the end of 2015. For Bank of America that would mean a higher yield on its earning assets, which would translate into an increase in net interest income and thereby boost the Charlotte, North Carolina-based bank's bottom line.
Indeed, if there's any single thing that's weighing on profitability and valuations in the bank industry, it's unprecedentedly low interest rates. JPMorgan Chase has estimated that it will earn $7.5 billion more in pre-tax income if rates "normalize" around 2.25%. And Bank of America expects to earn roughly $4.5 billion more in annual net interest income if both short- and long-term rates increase by 100 basis points, or one percentage point.
It should come as little surprise, in other words, that the Fed's recent caution regarding higher interest rates is an unwelcome development for the nation's largest lenders.
This situation won't prevail indefinitely. As a result, if you're looking for a good entry point, you'd be excused for thinking that today's pull back offers one.