Equity prospects

BANK OF AMERICA

John Royden, Head of Research

Price$27.73

52 week high-low$31.37—$22.66

Net yield2.2%

Hist / pros per9.7—9.8

Equity market cap$258,119

Bank of America, as the name suggests, is an American bank through and through. Close to 85% of revenues and profits come from America and its 210,000 employees staff its 5,000 branches across the US. 

The big question for investors is what is going to happen to US interest rates going forward? NIM or “net interest margin” is the issue. Banks have traditionally relied on a bid / offer spread of loans vs. deposits of c4%. That is to say banks would pay you 4% on your deposits and lend money at 8% for example. As the loan rate declines to closer to zero, Bank of America is unable to charge negative interest rates on deposits because customers are then incentivised to hold cash. Although it must be noted that Swiss bank, UBS is currently trying negative rates on large deposits. 

My view is that inflation is going to re-emerge in the US and that this will lead to interest rates going higher after this round of monetary relaxation. Inflation is probably coming because Trump will want a trade war victory before the next election and this will be a stimulus for a very low unemployment economy and put upward pressure on wage and then CPI inflation. Once this interest rate cutting cycle is done, I think that higher rates should drive higher net interest margin at the bank. 

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