Bank Of America Still Hurting From Interest Rates

| About: Bank of (BAC)

Although Bank of America (NYSE:BAC) has been spending a lot of time and effort on cost cutting measures and balance sheet improvements, there are some external factors that are making it extremely difficult for BAC (and others) to grow revenues.

Traditional banking business relies on the yield curve to amplify the interest-based income that is made on loans. Bank of America is able to take out a short term loan from the Fed, or another bank, at low interest rates while lending that money to a business (or some other entity) that pays higher interest rates that reflect the bank's perceptions of the riskiness of the loan.

If you look at Bank of America's earnings reports, you can clearly see some struggles to grow revenues. For instance, in Q2 2012 we saw a ~15% slide in interest income for the Consumer and Business Banking. Mitigating this damage (to some extent) was non-interest income which remained flat in the same period of time.

We are seeing the same trends in real estate services (which reflect the constant decline of mortgage rates across the United States) and the Global Banking segment which tells us that this phenomenon is not contained within the United States. Cheap loans are all over the world, and the banks making them are now operating on much leaner streams of income from these interest differentials.

In the past, when I've written about BAC and the other major banks (especially JPMorgan (NYSE:JPM)) I've emphasized the importance of their core banking business. Investment banking, for instance, is a fundamentally challenged industry that is not expected to recover for many years (if ever). Asset management is not going to produce enough income to make BAC worth for shareholders either, since so much of the income goes towards the employees.

Ultimately, I believe that until the yield curve gets steeper, major banks will experience virtually no revenue growth. Yes, the banks can grow their earnings a bit through cost cutting, but this strategy gets less plausible with each passing quarter. To bring back the financial industry, we need yield curves that don't resemble a pancake.

The Federal Reserve seems convinced that a low yield curve will result in cheap lending that could stimulate the US (and global) economy. This may or may not be true (there's conflicting evidence), but one thing is certain - banks aren't exactly helped by the situation.

Bank of America is still a cheap stock, that should probably be trading at double where it is now (maybe as high as $20/share based on its book value), but the market will probably not get interested until the bank can show everyone some solid top-line growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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