For at least one part of the banking business, good news is finally around the corner.
When the Federal Reserve increases interest rates (which its expected to do starting this week), lending businesses will reap the benefits.
“This is a tiny, tiny, tiny increase in interest rates that will help banks immeasurably,” Richard Bove, a bank analyst at Rafferty Capital Markets, told Business Insider.
The biggest firms have already laid out the additional revenue they stand to make once rates start to rise.
JPMorgan says a one per cent increase in interest rates will add $3 billion to “interest income” — or money earned from making loans — over a 12-month period; Citigroup stands to make about $2 billion in revenue and Bank of America says it could pick up about $4.5 billion in additional revenue.
It will be a while before the Fed’s increases get to a full one per cent. It’s likely to raise rates in quarter-point increments, and that with a great deal of hesitation. Most Wall Street executives expect between three and four rate hikes, with the central bank likely taking a break within the next 12 months.
Still, once it starts to add up, that’s a healthy bump to a big source of revenue. At Bank of America, interest income from loans and leases in the first nine months of the year was about $24 billion.
While rising rates are going to cause some turbulence in other parts of the business, like investing and dealmaking, bankers think they can count on a little extra revenue to pad balance sheets.
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