Banks are not yet completely clear

Falling interest rates are generally good news for banks, especially if the cuts do not portend a recession.

That’s because lower interest rates will slow the migration of money, which has occurred over the past two years as customers shifted cash from checking accounts to higher-yielding options like CDs and money market funds.

When the Federal Reserve cut its benchmark interest rate by half a percentage point last month, it marked a turning point in its stewardship of the economy and telegraphed its intention to cut rates by another two full percentage points, according to the central bank’s projections, which improved the prospects. for banks.

But the ride likely won’t be a smooth one: Persistent concerns about inflation could mean the Fed doesn’t cut rates as much as expected and Wall Street’s projections for improvements in net interest income — the difference in what a bank earns by to lend money or invest in securities and what it pays depositors – may need to be dialed back.

“The market is bouncing around on the fact that inflation appears to be accelerating again, and it makes you wonder if we’ll see the Fed pause,” he said. Chris Marinac, research director at Janney Montgomery Scott, in an interview. “That’s my fight.”

So when JPMorgan Chase Bank earnings start Friday, analysts will be looking for any guidance managers can provide 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.

While all banks are expected to ultimately benefit from the Fed’s easing cycle, the timing and magnitude of that shift is unknown, based on both the interest rate environment and the trade-off between how sensitive a bank’s assets and liabilities are to falling rates.

Ideally, banks will enjoy a period when funding costs fall faster than returns on income-generating assets, increasing their net interest margins.

But for some banks, their assets will actually fall in price faster than their deposits in the first phase of the easing cycle, meaning their margins will take a hit in coming quarters, analysts say.

For large banks, NII will fall an average of 4% in the third quarter due to tepid loan growth and a slowdown in deposit repricing, Goldman Sachs banking analysts led by Richard Ramsden said in an Oct. 1 note. Deposit costs for large banks will rise further in the fourth quarter, the note said.

Last month, JPMorgan alarmed investors when its president said expectations for next year’s NII were too high, without providing further details. According to analysts, it is a warning that other banks may have to give.

“It’s clear that as interest rates fall, there is less pressure on deposit repricing,” JPMorgan President Daniel Pinto told investors. “But as you know, we are quite asset sensitive.”

However, there are compensations. Lower interest rates are expected to help the Wall Street businesses of major banks, as they typically see higher transaction volumes when rates fall. Morgan Stanley analysts recommend owning shares Goldman Sachs, Bank of America And Citi Group for that reason, according to a Sept. 30 research note.

Regional banks, which bore the brunt of the pressure from higher funding costs as interest rates rose, are seen as bigger beneficiaries of falling interest rates, at least initially.

That’s why Morgan Stanley Analysts have increased their ratings American bank And Zion last month, while lowering their recommendation on JPMorgan from overweight to neutral.

Bank of America and Wells Fargo have revised NII expectations throughout the year, according to analyst Charles Peabody of Portales Partners. That, combined with the risk of higher-than-expected credit losses next year, could make for a disappointing 2025, he said.

“I’ve been questioning the rate of increase in NII that people have built into their models,” Peabody said. “These are dynamics that are difficult to predict, even if you are the management team.”