U.S. bank stocks soared on Thursday after the Federal Reserve’s big interest rate cuts, as easing monetary policy is expected to boost growth for Wall Street giants and smaller regional financial institutions. This is a sign of bullishness among investors.
Capital One (COF) and Citigroup (C) each rose 5% on Thursday, followed by Goldman Sachs (GS), Bank of America (BAC), Wells Fargo (WFC), and JPMorgan. Chase (JPM) and Morgan Stanley (MS) also rose slightly. ).
The KBW Nasdaq Bank Index (^BKX) and two other indexes that track large (KRE) and midsize (^KRX) regional banks all rose more than 2%.
What banks and their investors are hoping is a repeat of 1995, when a soft landing in the U.S. economy and the start of a rate-cutting cycle triggered one of the best multi-year periods in U.S. history for banks.
The reality of how this moment will play out for banks is likely even more complex, and many unknowns still lurk.
How the benefits and costs of lower interest rates will affect most banks will be reflected in their net interest income, a key revenue measure that measures the lending margins left after banks pay their depositors.
David Solomon, CEO of Goldman Sachs. (Reuters/Brendan McDiarmid) (Reuters/Reuters)
Moody’s Ratings said in a note earlier this week that the rate cut would initially be “credit negative” for most banks due to an expected contraction in net interest income.
“We expect deposit costs to reprice more slowly than loan yields, constraining net interest income, the largest source of revenue for most banks,” Moody’s Ratings analysts said in a note earlier this week. “
Last week, JPMorgan Chief Operating Officer Daniel Pinto said the consensus among analysts that the bank’s profits would be $91.5 billion in 2025 was “a bit too optimistic,” due in part to lower interest rates. , warning investors.
A press conference by Federal Reserve Chairman Jerome Powell is shown on a screen in the New York Stock Exchange’s trading floor. (Reuters/Andrew Kelly) (Reuters/Reuters)
But Moody’s says things look brighter in the long run.
“Reductions in deposit costs should catch up with net interest income, strengthening it. Additionally, lower interest rates, which prolong economic growth, will help banks maintain and improve asset quality,” Moody’s said. analysts said in a note.
Gerald Cassidy, an analyst at RBC Capital Markets, said that as major banks set aside more reserves for potential loan losses over the next 12 months, they also expected to see “improved earnings” in 2025. ” I predict.
Commercial real estate for rent along 125th Street in New York City’s Harlem neighborhood. (Reuters/Shannon Stapleton) (Reuters/Reuters)
Those feeling the most immediate relief will be local banks with high exposure to commercial real estate. The industry has been weakened by the Federal Reserve’s aggressive rate hike campaign and increased real estate vacancies in central cities following the coronavirus pandemic.
Stephen Alexopoulos, an analyst covering small and medium-sized banks at JPMorgan, said lower federal funds rates would reduce demand from commercial borrowers over time because they reduce uncertainty about the economy and the amount borrowers will pay. He said demand would be “stimulated”. Note.
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“We see this sector as poised to be reassessed,” Alexopoulos added.
A previous version of this article incorrectly stated the net interest income that analysts expected JPMorgan Chase & Co. to earn next year. We apologize for the error.
David Hollerith is a senior reporter at Yahoo Finance, covering banking, cryptocurrencies, and other financial areas.
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