Bank of America Corp (BAC), PNC Financial Services (PNC): Rising Rates a Headwind for these Banks

One of the reasons why the aforementioned banks will experience declines in their book values, while some banks (like JPMorgan Chase & Co. (NYSE:JPM) and U.S. Bancorp (NYSE:USB)) are expected to report growth in their book values is the difference between the durations of the available-for-sale securities. The longer the duration of the fixed income portfolios, the more sensitive its book value is to any changes in the interest rates.

Net Interest income

Another key impact of changes in interest rates is the sensitivity of the banks’ net interest income. Net interest income is the difference between what banks earn on their interest earning assets and what they pay on their interest bearing liabilities. Let’s look at the sensitivity of net interest incomes for the banks considered in this article.

Looking at the financial disclosures provided by the banks and reported by Credit Suisse, Bank of America’s projected net interest income will increase the most if the rates climb 100 bps. Investors should expect the net interest income of Bank of America to climb 8.9%, while they should not experience any significant changes in PNC Financial Services (NYSE:PNC)’s net interest incomes if rates go up 100 bps. Wells Fargo reported a net interest margin of 3.46%, down 2 bps over the prior quarter.

Conclusion

I believe investors should be cautious before making an investment decision in banking stocks given rising interest rates. The rise in rates does not mean higher income for all the banks. The decline in  book values of banks should also be considered before making an investment decision.

I believe Bank of America and PNC Financial are the three large cap banks that will be hurt the most because of the rising interest rate environment. So, I would recommend investors stay away from these banks in the near-term.

Adnan Khan has no position in any stocks mentioned. The Motley Fool recommends Bank of America and Wells Fargo. The Motley Fool owns shares of Bank of America, PNC Financial Services, and Wells Fargo.

The article Rising Rates a Headwind for these Banks originally appeared on Fool.com and is written by Adnan Khan.

Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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