Bank of America: Interest Rate Play


Bank of America: Interest Rate Play

Banks could benefit from a normal, upward sloping interest-rate yield curve not too far down the road.

So the Federal Reserve Board has elected to stop jacking up interest rates for the time being. The housing and employment markets are cooling, energy prices are coming down and economic growth has come off the boil. What's next for interest rates?

Ted Baszler, portfolio manager of Heartland Select Value, thinks the Fed could start cutting rates by the end of this year (see the Kiplinger forecast). Long rates won't fall with short rates and could even rise, he figures. Result: a more normal, upward sloping interest-rate yield curve, in which long-term rates are noticeably higher than short-term rates. Such a normally shaped yield curve implies wider lending margins -- and plumper profits -- for banks. "Wall Street in general is not paying enough attention to financials," says the Milwaukee-based fund manager.

One of Heartland Select Value's recent purchases is Bank of America (BAC), which closed September 22 at $52.49, just 11.4 times this year's estimated earnings of $4.62 a share. Baszler likes the bank's conservative lending practices and thinks wider interest-rate margins can help B of A keep raising profits by 10% a year.

The bank's shares yield an enticing 4.3%, and dividends have compounded at an impressive 13% annually for a decade. Baszler thinks Charlotte, N.C.-based B of A can keep boosting the dividend, which will become increasingly attractive to investors as money-market and bank-deposit rates come down. Banks play the yield curve; you can, too.