U.S. bank stocks jumped Thursday after the Federal Reserve cut rates sharply, a sign of optimism among investors who now expect easing monetary policy to boost Wall Street giants and smaller regional lenders.
Goldman Sachs (GS), Capital One (COF) and Citigroup (C) each rose 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 regional (KRE) and mid-sized (^KRX) banks also gained 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 rate-cutting cycle triggered one of the best periods in U.S. banking history.
The reality of how this period will play out for banks is likely more complicated, with many unknowns still looming.
How the benefits and costs of low rates affect most banks will be reflected in their net interest income, a crucial revenue measure that represents the lending margin left after banks pay their depositors.
Moody’s Ratings said in a note earlier this week that the rate cuts would initially be “credit negative” for most banks because of an expected tightening of that net interest income.
“We expect their deposit costs to decline more slowly than their loan yields, which will limit net interest income, which is the main 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 alarmed investors when he said analysts’ consensus view that the bank would earn $94 billion in 2025 was “a little too optimistic,” partly because of the impact of lower rates.
But in the longer term, things look more promising, according to Moody’s.
“Reducing deposit costs will help catch up and strengthen net interest income. Moreover, if lower rates prolong economic growth, they will help banks maintain and improve their asset quality,” Moody’s analysts said in their note.
RBC Capital Markets analyst Gerard Cassidy expects big banks to set aside higher provisions for potential loan losses over the next 12 months, while forecasting “better earnings” in 2025.
The most immediate relief could be felt by regional banks most exposed to commercial real estate, a sector weakened by the Fed’s aggressive rate-tightening campaign and the surge in downtown real estate vacancies that followed the COVID-19 pandemic.
Over time, a cut in the federal funds rate will “trigger” demand from commercial borrowers because such cuts reduce uncertainty about the economy and what borrowers will have to pay, Steven Alexopoulos, a JPMorgan analyst covering mid- and small-cap banks, said in a note Thursday.
“We believe the sector is ripe for re-evaluation,” Alexopoulos added.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other areas of finance.
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