Banks

Bank of America CFO warns that falling rates will hit net interest income

Key Points
  • Growth in net interest income at the bank, pegged at 3% for 2019 in April, may now be closer to 1%, Bank of America CFO Paul Donofrio tells analysts.
  • "The forward curve anticipates two Fed fund rate cuts in 2018, and another in 2020," Donofrio says.
Brian Moynihan, chief executive officer of Bank of America Corp., listens during a 2019 House Financial Services Committee hearing.
Andrew Harrer | Bloomberg | Getty Images

Bank of America is the latest lender to warn how falling interest rates will cause a main engine of bank profits to sputter to a halt this year.

The firm said in April that growth in net interest income would slow from 6% last year to 3% for 2019. However, that measure may slow further to about 1% this year if the Federal Reserve cuts interest rates twice, Chief Financial Officer Paul Donofrio told analysts Wednesday during a conference call.

"From here, if we were to assume stable rates, we think our NII for 2019 would now be up approximately 2% compared to 2018," Donofrio said. "If rates follow the forward curve, and the Fed funds rate were indeed to be cut twice this year starting this month, we think it would likely shave another 1 percent off NII growth for 2019."

Global economic conditions have worsened in recent months amid the U.S.-China trade dispute, and the Fed has signaled it is likely to cut its benchmark interest rate later this month. That has roiled the shares of banks including Wells Fargo and J.P. Morgan Chase this week, which have both indicated that falling rates will impact net interest income. NII is the spread banks earn by making loans at a higher interest rate than what they pay depositors.

Both long and short term rates have declined in recent months, and that hurts the bank in three ways, Donofrio said: So-called "floating rate" assets held by the bank will yield less; new bonds purchased will offer lower coupons, hitting returns on the bank's portfolio, and mortgage customers may refinance at a lower rate.

Shares in Bank of America were up 2% Wednesday afternoon after earlier falling more than 1% in premarket trading. The bank posted a record profit that exceeded analysts' estimates on the strength of its retail banking and wealth management divisions.

Helping matters, CEO Brian Moynihan indicated on the call that the bank could dial back expenses if the revenue environment warranted it.