A Fed rate hike could boost Bank of America's profits by more than $1 billion

Bank of America CEO Brian Moynihan said a sharp increase in Federal Reserve interest rates would have a positive impact on the bank's profits in 2023.

Moynihan said it was commonly known that the way banks earn most of their money is a so-called spread, which is the difference between the rate at which they lend money to borrowers and the rate that they pay on deposits. And that difference was sharply compressed when rates fell, and now it's widening again, reaching a more normal level, and that's led to a rapid increase in net interest income.

Moynihan added looking ahead they've told their shareholders that they expect a billion-dollar increase in earnings from the third to the fourth quarter.

There is a widespread opinion among economists concerning the recent policy of the Fed. Many of them believe that the Fed will continue raising rates for at least three times more. In the end, the rate will be about 5%.

This could substantially increase profits for banks like Bank of America, provided there is no recession caused by a slowdown in consumer spending.

The effect of higher rates has already begun to show in Bank of America's third-quarter earnings. BofA's third-quarter net interest income rose 24% to $13.8 billion.

Kabir Caprihan, JP Morgan analyst, added that the quarter underscores the bank's profitability as it benefits from higher short-term rates. The business environment is expected to remain favorable for at least the next few quarters.

Caprihan reiterated a "Buy" recommendation on Bank of America shares.