The US Federal Reserve's quantitative easing (QE) programme has left banks starved for higher interest rates. The five largest commercial US banks by Tier 1 capital – JPMorgan, Bank of America (BoA), Citigroup, Wells Fargo and PNC – estimate that a 1 percentage point increase in interest rates would result in higher interest income, with the figure being as high as $3.69bn for BoA. However, the end of QE will also send down the value of banks’ securities portfolios, which increased under the programme.
But, while banks will see the value of their debt portfolios fall, lenders with investment divisions may also gain from the return of interest rate differentials, creating more volatility and hedging opportunities, which should boost profits in fixed-income, currency and commodities divisions (FICC).