Bank of America Optimistic but Warns of Risks from Falling Interest Rates

Amidst growing economic uncertainty, Bank of America is the latest lender to warn of the risks from falling interest rates. Most notably, the financier cautions that a major driver of bank profits will start to grind to a halt this year. 

According to the firm, back in April, growth in net interest income will slow to 3 percent, from 6 percent, for 2019.  At the same time, the metric suggests further slowing—perhaps all the way down to 1 percent—this year, especially if the Federal Reserve bank executes two interest rate cuts.  

Bank of America Chief Financial Officer Paul Donofrio advises, “From here, if we were to assume stable rates, we think our NII for 2019 would be up approximately 2 percent compared to 2018.  If rates follow the forward curve, and the Fed funds rate were indeed to be cut twice this year starting this month, we think it would likely shave another 1 percent off NII growth for 2019.”

It probably comes as no surprise that global economic conditions continue to decline, particularly with the US-China trade dispute over the past few months.  If there is any good to come out of this, the result of this struggle, it might help push the Fed to initiate a cut to its benchmark interest rate, at some point later this month.  

Should this occur, Wells Fargo and JP Morgan Chase—among other financial institutions—warn it will impact net interest income; they have already seen volatility increase in share price.   

Moreso, we have seen decline in both long and short term rates, in just the past few months, which has damaged banks in several ways. Donofrio explains that the “floating rate” will have lower yield, as will new bonds (which will, in turn, hurt returns on the bank’s overall portfolio). Also, mortgage holders might have to refinance at lower rates.

At the end of the day, Bank of America shares rose only about 1 percent after market open, recovering from a fall of roughly the same in premarket trading.  Still, the bank has posted record profits that definitely exceeded market analyst estimates thanks to strong retail banking and wealth management results. 

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