Main Street banking is poised to see the best growth since the 1980s, when Madonna and Michael Jackson were on MTV, Ronald Reagan was in office, and everyone had long hair and wore neon attire. And Bank of America (BAC) will be the biggest winner.
That’s according to Wells Fargo analyst Mike Mayo, who told Yahoo Finance Live on Thursday that traditional banking revenue will grow the same way it did in the 1980s, creating a boom for the industry in the next three years. Moreover, BofA stands to gain the most, said Mayo, adding the bank is likely to get a further boost from the Federal Reserve’s interest rate hike.
“The business model that Bank of America has put in place over the last decade now bears more fruit than you’ve seen for any period under [CEO] Brian Moynihan,” said Mayo, attributing BofA’s success to the company’s growing deposits in recent years, as well as its focus on financial technology. “Now they get to put that money to work.”
During the 1980s, Main Street banking experienced growth in net interest income — or traditional banking revenue.
“We think Bank of America and the industry as a whole will have the best growth in that category [traditional banking revenue] in over three decades, and that’s super-powerful,” said Mayo. “And it’s even more in place after the news from the Fed yesterday, when they announced they’re going from six rate hikes through the end of next year up to 11.”
The U.S. central bank revealed Wednesday at the conclusion of its two-day, policy-setting meeting that it will lift its benchmark Federal Funds Rate by 0.25%, to a target range of 0.25% to 0.50%. The Fed’s updated Summary of Economic Projections, or “dot plot,” which reflects the individual economic projections of policymakers on the Federal Open Market Committee, showed the median member anticipates up to six more rate hikes in 2022, which would bring rates 1.75% higher at the end of this year.
Before the move, the benchmark interest rate was deliberately held near zero since mid-2020 as part of the Fed’s easy money policies used to keep financial conditions running smoothly during the pandemic.
Bank of America previously front-loaded costs to increase primary checking accounts and grow deposits to levels that far outpaced the rest of the industry, making it well-positioned to leverage those efforts, Mayo explained in a recent note to clients. A backdrop of higher interest rates helps the bank more than its peers because of BofA’s $2 trillion in “mostly sticky” low-cost deposits, which can help fund higher yielding securities and loans that boosts its net interest income (the bank’s earnings on its lending activities and interest it pays to depositors) and net interest margins (calculated by dividing net interest income by the average income earned from interest-producing assets.)
Wells Fargo estimates BofA holds $1 trillion in mostly price-insensitive (for the first four to five rate increases), low-cost retail deposits, which are funding $600 million in floating rate loans. Although the other $1 trillion is more price sensitive, the sensitivity is not enough to push deposit betas, a measure of how responsive a bank’s deposit repricing is to a change in market rates in the near future.
Also contributing to BoA’s upside potential is its position as one of the “greatest fintech players on the globe,” during a time of a technology revolution in the industry, according to Mayo.
“You have the cyclical factors of more Fed rate hikes at a time of loans growing, helping what’s called net interest income. At the same time, the tech revolution at banks allows more of those revenues to fall to the bottom line,” he added.
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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc
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