Skip to Content
US Videos

Bank of America Is Best Positioned for Rate Increase

Demographics, technical factors, and the leverage cycle should lead to higher interest rates, which will help boost the consumer banking giant.

Bank of America Is Best Positioned for Rate Increase

Jim Sinegal: We think the big U.S. banks are poised to benefit as rates finally start to increase. Three factors we think are going to drive a normalization of rates over the next several years: First is demographics. We have the millennials moving from their 20s into their 30s. We have the baby boomers moving into retirement age and a very similar phenomenon in China where an aging population is going to drive down savings, drive up spending.

Secondarily, we have technical factors. The end of quantitative easing is upon us. That should help rates start to move up, and as oil prices have fallen from over $100 to under $50, there's a lot of savings out of petroleum-exporting nations that was around two years ago, is no longer there to drive rates downward.

Third, we have the leverage cycle. We think consumers in the U.S. have already started to borrow. We've seen that in auto loans. We've seen credit card demand increase. We think as mortgage demand finally rebounds that will be a third factor contributing to higher demand for credit and higher interest rates.

As rates go up, we think Bank of America is best positioned to benefit. We have a $20 fair value estimate on the stock. Bank of America is the most leveraged to rates for two reasons. Number one, it has the most exposure to the U.S. consumer. More importantly, it's the most directly exposed to rising rates. Bank of America will make an additional $7.5 billion per year if short-term rates exceed 100 basis points. We're already a quarter of the way there. We think we'll get the rest of the way there over the next two years.

Sponsor Center