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The yield curve has historically had little to do with BAC's net interest margins.

Investors shouldn't be scared out of bank stocks because of a flattened yield curve.

We'll examine a ten year data set to show that the flat yield curve myth is just that.

Anyone who reads my articles knows I think Bank of America (NYSE:BAC) is a terrific value at current prices. However, there are plenty of investors who disagree and one reason I hear a lot is that banks will struggle "when the yield curve flattens," whenever that may happen. I thought it might be instructive to inform these investors that the yield curve has flattened many, many times prior to today and that the banking world did not implode and in fact, BAC in particular continued to earn its net interest margins, or NIM, even through a flat or inverted yield curve. In this article, we'll take a quick look at why the "flat yield curve" argument is invalid and why you shouldn't be scared of bank stocks for that reason.

To begin, I've pulled Bank of America's NIM for the past 10 full years, ending in 2013 (source: SEC Filings). We could look at more or less data but for the purpose of this article, this timeframe is more than sufficient. Below, we can see that BAC's NIM has moved around a bit but in a second, we'll see why I think the flat yield curve argument is uninformed.

(click to enlarge)

We see BAC's NIM move between 2.4% and 3.2% in the past ten years with last year coming in a just under 2.5%. Now, let's take a look at the US Treasury 10/2 Spread, a common measure of banks' ability to borrow short and lend long, to see what a flattened yield curve does to margins (source: Federal Reserve H.15).

(click to enlarge)

What do we see here? I am showing data from January 2000 through today in order to paint the picture for the flat yield curve naysayers to see that history repeats itself and the banks of the world have not collapsed due to declining spreads. As we can see, the 10/2 spread was actually negative at a few points in the past 15 years with a substantial negative period in 2000 and shorter bursts of negative spreads in 2006 and 2007. The high point of the spreads has typically been between 2.5% and 3%, compared to about 2% today.

Now, what does this mean? Well, if the flat yield curve investors were right we should see NIM absolutely collapse during periods of thin or negative spreads. As we can see, there have been years at a time in the past 15 years where spreads were below 1%. If the flat yield curve argument was sound, banks should have been losing enormous amounts of money during those times. As we all know, that didn't happen.

In fact, if we reexamine the NIM chart above we can see that while NIM moved around a bit, it has almost no correlation to the 10/2 spread, meaning that the coming flattening of the yield curve that these naysayers are so sure about should do absolutely nothing to NIM. The point is that even if yields do compress and the yield curve flattens or even inverts, so what? We've seen definitive proof here that it doesn't matter at all because bank managements are smarter than simply funding themselves with short term debt and loaning it out long term. Deposits are the main funding source for banks, not short term debt, and those carry with them very miniscule interest costs.

Where is the evidence that a flattened yield curve is bad for banks? In theory it makes sense that a flat yield curve is bad for any company that borrows money to lend it out. However, in practice, funding sources are so diverse for a big bank like BAC that it really doesn't matter at all. So the next time you hear someone say that BAC or other banks are going to struggle because of a flattened yield curve, now you know better. That argument has no basis in reality, as we've just seen. In fact, if BAC sells off due to interest rate movements consider it a buying opportunity because those sellers don't know what they're doing. We know that BAC will make its NIM regardless of the yield curve.

Disclosure: The author is long BAC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.