Bank of America Corp (NYSE:BAC) Is Likely To Benefit From Fed Rate Hikes

October 11, 2017, 10:31 am ET, BY Simon M.- Contributor| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

Bank of America Corp (NYSE:BAC) emerged much stronger from the financial crisis and recession of 2008 given the tighter controls instituted by the Federal Reserve in response to the crisis in the banking sector.

The Federal Reserve has tightened financial regulations in the recent past as evidenced by the recent interest rate hikes and the tougher requirements for most banks in order to pass their annual stress tests.

The bank is set to benefit from the improving lending rates in the US even as the Federal Reserve is expected to hike rates once more in December this year. Bank of America is in the process of improving its balance sheet while at the same time focusing on increasing operational efficiencies.

The bank faces stiff competition from other bulge-bracket US financial institutions such as Citigroup Inc (NYSE:C), Wells Fargo & Co (NYSE:WFC), and JPMorgan Chase & Co.

(NYSE:JPM). However, BAC currently trades at a discount to its competitors, which might appeal to many growth investors in the banking sector.

Warren Buffet recently increased his stake in the bank by exercising his warrant to purchases 700 million shares of the company. This is Buffet’s biggest stake in a financial company and even dwarfs his holdings in Wells Fargo and the American Express Company (NYSE:AXP).

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Some analysts have faulted Buffet’s recent move to increase his stake in the company saying that this move concentrates a significant portion of his portfolio in one company instead of diversifying his holdings. However, it is clear that Buffet bought the stock because he believes that the company has potential for future growth given that it does not pay a substantial dividend.

BAC’s management predicted during a recent earnings call that every one-percentage point increase in short-term rates would result in a $2.2 billion increase in its net interest income on an annual basis. This is evidence that the bank stands to benefit significantly from any future interest rate hikes by the Federal Reserve.

The bank’s current operations metrics and future growth prospects indicate that Bank of America still has room to grow. However, the question remains whether the bank is a good investment at its current valuation.

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