Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day Federal Open Market Committee meeting on interest rate policy in Washington, U.S., September 18, 2024. REUTERS/Tom Brenner
Tom Brenner | Reuters
Falling interest rates are usually good news for banks, especially if the rate cuts are not a harbinger of a recession.
That's because lower interest rates will slow the money migration that has occurred over the past two years as customers moved cash from checking accounts into higher-yielding options like CDs and money market funds.
When the Federal Reserve cut its key interest rate by half a percentage point last month, it signaled a turning point in its management of the economy and announced its intention to cut interest rates by another two full percentage points, according to Fed forecasts, boosting the outlook for the Economy improved banks.
But the ride probably won't be smooth: Persistent concerns about inflation could mean the Fed doesn't cut interest rates as much as expected and Wall Street forecasts for improvements in net interest income – the difference between what a bank earns through the Lending earned or investing in securities and what it pays depositors – may need to be withdrawn.
“The market is rallying on the fact that inflation appears to be accelerating again, and one wonders whether the Fed will take a pause,” Chris Marinac, director of research at Janney Montgomery Scott, said in an interview. “This is my fight.”
So when JPMorgan Chase When banks report earnings on Friday, analysts will be looking for forecasts managers can give on net interest income in the fourth quarter and beyond. The bank is expected to report earnings of $4.01 per share, down 7.4% from the same period last year.
Known unknowns
Although all banks are expected to ultimately benefit from the Fed's easing cycle, the timing and extent of this shift is unknown because it is based on both the interest rate environment and the interaction between the sensitivity of a bank's assets and liabilities to falling interest rates .
Ideally, banks experience a period where funding costs fall faster than returns on income-producing assets, increasing their net interest margins.
But some banks will actually see their assets fall faster than their deposits in the early stages of the easing cycle, meaning their margins will take a hit in the coming quarters, analysts say.
At large banks, NII will fall an average of 4% in the third quarter due to subdued loan growth and a lag in deposit revaluations, Goldman Sachs banking analysts led by Richard Ramsden said in an Oct. 1 note. The deposit costs for major banks would continue to rise in the fourth quarter, according to the statement.
Last month, JPMorgan alarmed investors when its president said expectations for next year's NII were too high, without providing further details. Analysts say it is a warning that other banks may be forced to issue.
“As interest rates fall, there is clearly less pressure to revalue deposits,” JPMorgan President Daniel Pinto told investors. “But as you know, we are very asset sensitive.”
However, there are offsets. Lower interest rates are expected to support the operations of major Wall Street banks, as they tend to see larger transaction volumes when interest rates fall. Analysts at Morgan Stanley recommend owning it Goldman Sachs, Bank of America And Citigroup This is why it says in a research note dated September 30th.
Regional optimism
Regional banks, which suffered most from the pressure of higher financing costs when interest rates rose, are seen as the bigger beneficiaries of falling interest rates, at least initially.
For this reason Morgan Stanley Analysts have raised their ratings US Bank And Zion last month, while lowering their recommendation on JPMorgan to neutral from overweight.
Bank of America and Wells Fargo have lowered their expectations for NII this year, according to Charles Peabody, an analyst at Portales Partners. That, combined with the risk of higher-than-expected credit losses next year, could lead to a disappointing 2025, he said.
“I questioned the rate of NII increase that people were building into their models,” Peabody said. “These are dynamics that are difficult to predict, even if you are the leadership team.”