Banks love higher interest rates because their net interest margin widens. It’s all about the spread between their cost of borrowing and the interest they charge from loans, asserts Sean Brodrick, editor of Wealth Megatrends.
So I have the ideal bank pick for you. It’s a moneymaker whose influence reaches the halls of power in Washington, D.C., and it’s a dividend raiser to boot.
Bank of America (BAC) provides banking services, credit cards, loans and investment advisory for clients. It operates 4,300 branches and 17,000 ATMs used to service over 66 million retail and small business clients.
The bank leads U.S. market share in both consumer deposits and small business lending. Higher deposits mean more money that the bank is able to lend out. With BAC’s substantial loan volume, wider margins from higher interest rates should boost the company’s top- and bottom-line growth.
Notably, Bank of America is following other big lenders in cutting overdraft fees, which should help low-income customers avoid additional financial stress. The shift could add customers during the time it takes the other banks to react.
These changes should establish goodwill with customers. It should also please lawmakers who were pushing for reform, and the fee reduction should have minimal impact considering that overdraft charges accounted for only about 1% of Bank of America’s total revenues last year.
Bank of America consistently exceeds earnings estimates, and the company has seen strong earnings per share growth in the past several quarters. In the Q3, its EPS of 85 cents beat estimates by 20% and grew 67% year over year. Its earnings are forecast to grow 29% year over year when it reports later in January.
Bank of America’s net interest margin also exceeded analyst consensus even in a low-rate environment. It increased for the first time since Q4 2018, and it signals a turning tide. Loan loss reserves fell by $1.1 billion, significantly improving BAC’s net income.
In October, Bank of America renewed its share buyback program to repurchase $25 billion of its common stock. Buybacks are a signal of confidence because they increase ownership for existing shareholders and improve financial ratios with fewer shares outstanding.
Bank of America raised its dividend 17% in Q3 2021 after the Fed’s stress test announcement. It now yields 1.7%, and it’s expected to continue increasing its distributions 13% per year over the next three years.
The bank is a reliable dividend raiser, boosting payments to shareholders by an average of 26% per year over the past five years. Recently, BAC traded at a 15-year high. The stock could consolidate for a brief period, but I expect that it will zig-zag higher.
