Bank of America, JPMorgan Hanging by Interest Rate Thread

NEW YORK (TheStreet) -- With interest rates at record lows, bank revenues are likely to come under further pressure, as the spread between the interest they earn and the interest paid shrinks.

Big banks such as Bank of America (BAC) and JPMorgan Chase (JPM) may be more vulnerable to interest rate pressures than their "diversified" business models imply, according to Stifel Nicolaus analyst Chris Mutascio.

In a report released on Tuesday, Mutascio notes that regional banks such as Comerica (CMA) derive a significant portion of their revenues from net interest income- the spread between the interest earned on loans and assets and the interest paid on deposits.

Regional banks are, therefore, often assumed to be the worst affected by a collapse in the yield curve.

But the large, global banks may in fact stand to lose more because they are exposed to a higher level of reinvestment risk, the analyst points out.

"The key risk in the current interest rate environment is reinvestment of cash flows and maturing securities into lower prevailing market rates. On this basis, Comerica may have less risk than implied by its asset-sensitivity given its low level of investment securities on balance sheet," the analyst wrote. "Conversely, capital markets banks like [JPMorgan Chase] and [Bank of America] may have more risk than perceived by their "diversity" given their high concentrations in investment securities as a percentage of earning assets."

For instance, investment securities as a percentage of average earnings assets is at 17% in Comerica.

For Bank of America and JPMorgan, that ratio stands at about 28% and 33% respectively.

Meanwhile, banks like Wells Fargo (WFC) may be protected from interest rate pressures to some extent because of their dominant market share in mortgages. Lower interest rates is likely to lead to an elongated refinance boom.

Wells derives about 13.5% of its revenues from mortgage banking compared to about 7.7% and 8.1% at Bank of America and JPMorgan.

Moreover, regional banks might still have the advantage of improving or maintaining their spreads by lowering the cost of deposits. But the big, global banks already have a low-cost deposit base and might find it harder to take advantage of declining interest rates in lowering their deposit costs.

Shares of Bank of America and JPMorgan Chase were each up about 3% on Tuesday morning, recovering from Monday's decline.

-- Written by Shanthi Bharatwaj in New York

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