U.S. bank stocks rose on Thursday after the Federal Reserve cut interest rates aggressively, a sign of optimism among investors who now expect the loosening of monetary policy to boost Wall Street giants and smaller regional lenders.
Shares of Goldman Sachs (GS), Capital One (COF) and Citigroup (C) were each up more than 3% Thursday morning, followed by smaller gains for Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM) and Morgan Stanley (MS).
The KBW Nasdaq Bank Index (^BKX) and two other indices tracking large (KRE) and mid-sized regional banks (^KRX) also rose about 2%.
What banks and their investors are hoping for is a repeat of 1995, when the soft landing of the U.S. economy and the start of a cycle of interest rate cuts sparked one of the best multi-year periods for banks in U.S. history.
The reality of how this moment will unfold for banks may be more complex, as there are still many unknowns on the horizon.
It will show how the benefits and costs of lower interest rates affect most banks’ net interest income, a crucial revenue measure that represents the lending margin left after banks pay depositors.
Moody’s said in a note earlier this week that rate cuts would initially be “credit negative” for most banks because of the expected tightening in net interest income.
“We expect their deposit costs to repriced more slowly than their loan yields, constraining net interest income, the largest source of revenue for most banks,” Moody’s analysts said in a note earlier this week.
Last week, JPMorgan Chase Chief Operating Officer Daniel Pinto unnerved investors when he said the consensus view among analysts that the bank would make $94 billion in profit in 2025 was “a bit optimistic” due in part to the impact of lower interest rates.
But in the longer term, things look brighter, according to Moody’s.
“Lower deposit costs would catch up and boost net interest income,” Moody’s analysts said in a note. “Moreover, if lower interest rates prolong economic growth, it would help banks maintain and improve their asset quality.”
RBC Capital Markets analyst Gerard Cassidy expects major banks to set aside higher provisions for potential loan losses over the next 12 months while also seeing “better earnings” in 2025.
Perhaps the most immediate relief will be felt by regional banks with larger exposures to commercial real estate, an industry that has been weakened by the Federal Reserve’s aggressive interest-rate tightening campaign and the soaring downtown vacancy rates that have followed the Covid-19 pandemic.
A decline in the federal funds rate over time will “ignite” demand from commercial borrowers, as those cuts reduce uncertainty about the economy and what borrowers will pay, Stephen Alexopoulos, a JPMorgan analyst who covers medium- and small-cap banks, said in a note Thursday.
“We believe the sector is ready for a reassessment,” Alexopoulos added.
David Hollerith is a senior reporter at Yahoo Finance covering banking, cryptocurrency, and other financial topics.
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