Regional bank distress gives CME Group a new growth opportunity, says BofA

BofA analyst Craig Siegenthaler estimates, using Q4 call report data from the Federal Financial Institutions Examination Council, that nearly 10%, or $1.8T, of aggregate deposits are held by banks that do not have interest rate hedging programs in place and notes that the exposure of depository institutions to interest rate risk has come into focus following the closure of Silicon Valley Bank (SIVB) and Signature Bank (SBNY). In light of the current high-profile bank crisis, BofA believes that both management teams and regulators are likely to re-evaluate bank exposure to interest rate risk and this may drive a wider proliferation of hedging among smaller depository institutions. CME Group (CME) "essentially has a monopoly" on U.S. interest rate futures trading and BofA estimates that CME could earn approximately $100M in incremental revenue annually by penetrating the unhedged regional and community banks. However, though the regional banking crisis has been incrementally beneficial for CME, the firm maintains its Underperform rating and $160 price target on the shares.