Interest rates were one of 2016’s hotter topics of conversation surrounding megabanks like Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and Wells Fargo & Co (NYSE:WFC). Ironically, once theory became reality, the buzz had already faded, and WFC, C and BAC stock all shrunk back.

But while owners of WFC, C and BAC stock have been waiting patiently on higher interest rates as a means of squeezing out greater profits, last week’s quarter-point rate hike from the Federal Reserve — with at least a couple more in the hopper for this year — is the best news that BofA shareholders have heard in a while.

And the potential numbers are nothing to sneeze at.

Higher Interest Rates Means Good News for Bank Stocks
The Q&D primer: A big chunk of a bank’s profits lies in the difference between its borrowing costs (funds borrowed from the government) and what it charges its borrowers for things like mortgages and auto loans.

[ad#Google Adsense 336×280-IA] When rates are low, these so-called “spreads” are narrow, and bank profitability is crimped.

As rates rise, these spreads widen, thus making banking a more profitable venture.

In that light, last week’s news from the Federal Reserve that the country’s foundational interest rate (the Fed funds rate) was nudged higher by 25 basis points is good news indeed.

The really good news, however, is the Federal Open Market Committee’s interest rate outlook for the rest of the year.

The committee believes two more rate hikes are in the cards for this year, and three more are suggested for 2018.

As they say, a rising tide lifts all boats, meaning higher interest rates should boost all banks’ profits.

Bank of America is particularly well-positioned, though, to benefit from the Fed’s plans.

Talking Numbers
All banks make loans, but not all banks make as many loans as BofA does, particularly to consumers. As of its most recently-completed quarter, its loan portfolio was a whopping $901 billion … second only to Wells Fargo.

An outsized portion of that portfolio is made up of consumer loans too, which are less risky than most business lending.

What that ultimately means for owners of BAC stock isn’t perfectly clear. The upside of a 100-basis-point increase in the market’s prevailing interest rates could add $6 billion to the company’s bottom line, at the low end, while at the high end of estimates could add $7.5 billion worth of interest income per year.

What is clear, however, is that higher rates are doing something fruitful.

CEO Brian Moynihan commented during the conference call discussing last quarter’s results that BofA could see an extra $600 million in profits per quarter on just a 25-basis-point rate hike. Indeed, Bank of America did see a jump in its bottom line last quarter even before the Fed took action last week. See, the market had been pumping up interest rates on its own, presuming Fed Chairwoman Janet Yellen would do what she ended up doing.

Now add the benefit of an estimated five more rate hikes between now and the end of 2018.

In the meantime, know that BofA is the custodian of $439 billion worth of non-interest-bearing deposits that it still has access to as a lending base. That’s the biggest in the business.

Bottom Line for BAC Stock
Even as higher rates set the stage for greater profits, BAC stock holders should also know the company is simultaneously culling costs, which will augment the bottom line too. Moynihan’s aim is to cut $5 billion out of the annual operating budget by 2018, and he’s already a big part of the way there.

Trading revenue was also impressive last quarter, up 11% year-over-year, with no serious slow-down detected during the first calendar quarter of 2017. The core reason to own BAC stock here, though, continues to be the prospect of rising interest rates.

Even if the Fed only puts half of its expected rate hikes in place, Bank of America stock stands to benefit big-time … more so than any of its rivals.

— James Brumley

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Source: Investor Place