Personal Finance

This Report Sent Bank of America Shares Tumbling on Friday


Because higher interest rates act to suppress economic growth and thus job formation, it seems increasingly likely that the downbeat news will influence the Fed to hold off raising rates when it meets this month.

Data source: U.S. Dept. of Labor.

This is bad news for Bank of America because higher interest rates will translate into higher profits. It estimates that a mere 100 basis point simultaneous increase in short- and long-term rates -- that is, one percentage point -- will boost its net interest income by $6 billion a year.

It would be an understatement to say that Bank of America desperately needs this to happen. In the first quarter of the year, its return on assets, a keystone profitability figure in the bank industry that compares a bank's profits to its average total assets, was 0.5%. That's half the 1% rate that most banks strive for.

Suffice it to say that a $6 billion pre-tax boost to Bank of America's top line would go a long way toward bridging this gap -- which, in turn, would go a long way toward increasing the valuation of its stock. Bank of America's shares currently trade for a 40% discount to book value, whereas a bank that sustainably earns 1% or more on its assets will trade at or above book value.

As a Bank of America shareholder, I would certainly like to see this come to fruition. However, as has been the case for much of the last eight years, it looks like we'll just have to continue to be patient.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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