Federal Reserve Chairman Powell holds a press conference after the two-day interest rate policy meeting in Washington, the United States, on September 18, 2024.
Tom Brenner | Reuters
Falling interest rates are usually good news for banks, especially when the rate cut isn’t a harbinger of a recession.
That’s because lower interest rates will slow the migration of funds that has occurred over the past two years as customers move cash out of checking accounts and into higher-yielding options like CDs and money market funds.
When the Fed cut its benchmark interest rate by half a percentage point last month, it marked a turning point in its management of the economy and signaled its intention to cut interest rates by another two full percentage points in line with the central bank’s forecasts, boosting the outlook for banks. .
But the process may not be smooth: Continued concerns about inflation may mean the Fed won’t cut rates as much as expected and Wall Street forecasts for improvements in net interest income — the difference banks make by lending money or investing in securities and their Fees paid to savers – may need to be scaled back.
“The market is rebounding because inflation appears to be accelerating again and you wonder if the Fed is going to pause,” he said. Chris Marinek, Interviewed by Jenny Montgomery Scott, Director of Research. “That’s my fight.”
So when JPMorgan Chase Analysts will be looking for any guidance from managers on net interest income in the fourth quarter and beyond after bank earnings are released on Friday. The bank expects earnings of $4.01 per share, down 7.4% from the same period last year.
known unknowns
While all banks are expected to eventually benefit from the Fed’s easing cycle, the timing and magnitude of this shift is unclear based on the interplay between the interest rate environment and the sensitivity of bank assets and liabilities to falling interest rates.
Ideally, banks will enjoy a period in which funding costs fall faster than yields on income-generating assets fall, thereby improving their net interest margins.
But analysts say that for some banks, their assets will actually reprice faster than deposits in the early stages of the easing cycle, meaning their margins will take a hit in the coming quarters.
Goldman Sachs banking analysts led by Richard Ramsden said in an Oct. 1 report that for the large banks, the second-largest financial crisis is likely due to tepid loan growth and lagging deposit repricing. NII will fall by an average of 4% in the three quarters. The report said that entering the fourth quarter, deposit costs for large banks will still rise.
Last month, JPMorgan warned investors that it The president said expectations for next year’s NII were too high but gave no further details. Analysts say this is a warning that other banks may be forced to issue.
“Obviously, as rates go lower, there will be less pressure to repricing deposits,” JPMorgan President Daniel Pinto told investors. “But as you know, we are very asset sensitive.”
However, there are some offsets. Lower interest rates are expected to help big banks’ Wall Street operations, as they tend to see greater trading volume when rates fall. Morgan Stanley analysts recommend holding Goldman Sachs, Bank of America and Citigroup For that reason, according to a Sept. 30 research note.
regional optimism
Regional banks, which bear the brunt of rising funding costs when interest rates climb, are seen as bigger beneficiaries of lower rates, at least initially.
that’s why Morgan Stanley Analysts upgrade ratings Bank of America and Zion’s Last month, they downgraded JPMorgan to neutral from overweight.
Portales Partners analyst Charles Peabody said Bank of America and Wells Fargo have been lowering their NII expectations throughout this year. Combined with the risk of higher-than-expected loan losses next year, 2025 could disappoint, he said.
“I’ve always questioned the rate of growth of the national information infrastructure that people are modeling,” Peabody said. “Even if you are the management team, these dynamics are difficult to predict.”
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