There are some big headwinds affecting the stock market right now, and the threat of rising interest rates and persistent inflation is a big one. However, while this can be a negative for many sectors, bank stocks -- and Bank of America (BAC +0.39%) in particular -- could be big beneficiaries. In this Fool Live video clip, recorded on Jan 10, I explain why Bank of America is my highest-conviction stock as 2022 gets underway.
Matt Frankel: So we'll call this No. 4, but it's really tied for three [out of other contributors' stock rankings for 2022]. This is Bank of America, which is one of my highest-conviction stocks. I will say this is my highest conviction stock for 2022. Just to hold myself accountable, my highest stock of the year last year was Wells Fargo. It almost doubled in 2021, I believe. I haven't looked at the final tally, but it was a very successful pick. I think Bank of America could be a great stock to have in 2022.
There are a few catalysts that could drive the bank higher. But just to give you an idea of where the business stands now, I want to give you one statistic. Everyone knows that the interest rate environment right now is very, very historically low in terms of interest rates consumers are paying on loans. Bank of America's net interest income went up 10% year over year in the third quarter, despite its net interest margin actually declining by four basis points.
How did they do it? I am going to show you a slide that will explain it all. These are some of the banks metrics from the third quarter compared to two years ago before the pandemic. Just to look at some of the highlights on there, 56% growth in net new checking accounts being added to Bank of America's platform. The average checking account at Bank of America has 40% more in it than it did before the pandemic. Most of Bank of America's checking accounts don't pay interest, by the way, so this is essentially free capital that they can use to make loans. Look at some of these other ones; their investment banking market share, which Bank of America is not thought of as a leading investment bank, but it is, their investment banking market share's up 60 basis points over the past few years.
Just all these statistics, everyone has been so caught up in what could happen to the banks as a result of the pandemic in the negative sense. Charge-offs, things like that, foreclosures. They've lost sight of the fact that the banking business is actually doing pretty well. All of this has really pushed up Bank of America's profit so far. Non-interest income, by the way, which is those investment banking fees, largely that I just mentioned, is up 14% year-over-year in the third quarter. But when we get past that, interest rates are supposed to start rising this year. They're highly projected to start rising this year. The Federal Reserve has said, inflation transitory might have been the wrong word, it looks like inflation is here to stay, and it's going to be a little tougher to get under control than we thought. The Federal Reserve's expecting to start raising rates in 2022.
But the market doesn't think just one or two rate increases are going to be enough. Here's a chart from the CME. This is what futures markets are predicting. Let me zoom in on that just a little bit. Right now, we're all the way up to list, the federal funds rate is between zero and 25 basis points, so essentially zero. The market expects either three or four rate hikes by December. That's a pretty big shift. Essentially rising by about 100 basis-points, say at the middle of that.
Jason Hall: That's one percentage point.
Frankel: It's a one percentage point. Here's why I mentioned that as so important. Look at this slide right here on Bank of America's presentation. Look in the gray box the last comment there. A 100 basis-point parallel shift in the interest rate yield curve is expected to benefit net interest income by $7.2 billion over the next twelve months. Now, imagine if the Fed has to raise rates by 200 basis points over the next couple of years, or 300 basis points to get interest rates under control. I will tell you, a 300 basis-point federal funds rate is not even close to being unprecedented historically.
The interest rate catalyst is one big reason I think Bank of America could have a fantastic 2022. Don't forget that the interest rate hikes are being caused by inflation, which means consumers are paying more for purchases, so the average auto loan that Bank of America finances is going to have a higher balance because of inflation. The average home loan they finance is going to have a higher balance because of inflation. They get more interest income on the rate and the principal balance with what's going on right here.
There is a lot to like about Bank of America and the banking industry in general, and Bank of America has a higher proportion of these non-interest-bearing deposits than their peers, which means that they're getting money without having to pay any interest on it, and consumers are going to have to pay higher interest rates as rates rise. That helps their margin a whole lot more than some of their peers. I really like this one for 2022.
