US bank shares rise as jumbo rate cut lowers default risk, cost fears By Reuters

By Niket Nishant and Manya Saini

(Reuters) – U.S. bank shares rose in premarket trading on Thursday, a day after the Federal Reserve cut interest rates by 50 basis points, which is expected to reduce deposit costs and ease pressure on borrowers.

Rising interest rates have weighed on loan growth and consumer spending this year, also raising fears that borrowers will default on their loans.

Commercial real estate loan portfolios have come under immense pressure from high rates and a lack of demand for office space, prompting banks to set aside billions as a cushion against delinquencies.

“For banks, particularly those that hold mortgages and auto loans, there could be an upside to short-term spreads,” said Charlie Wise, senior vice president and head of global research and advisory at TransUnion (NYSE: ).

Wells Fargo led gains in large-cap bank stocks, up 2 percent before the bell, closely followed by Citigroup and Bank of America, which climbed 1.9 percent and 1.7 percent, respectively.

JPMorgan, the largest U.S. bank by assets and the best view of the sector, last traded 1.3 percent higher. Investment banks Goldman Sachs and Morgan Stanley also rose more than 1.5 percent in earlier light trade.

REFINANCING WINDOW

Most car loans and mortgages have a fixed interest rate, which means banks will continue to earn higher returns even after the discount.

Borrowers looking for immediate help could also refinance their loans and negotiate better repayment terms, reducing the risk of default. Top banks echoed the Fed’s move and cut their lending rates on Wednesday, giving consumers an immediate reprieve on borrowing costs.

Regional banks are expected to benefit more from the interest rate cuts than their larger rivals as high deposit costs normalize and loan demand recovers.

“We expect a lower funds rate to ignite demand for loans from commercial borrowers,” said JP Morgan analyst Steven Alexopoulos. “Fed Tapering Reduces Uncertainty Over Borrowing Costs and Economy”.

Bank of California (NYSE: ) led regional bank gains, up 4.2% before the bell. KeyCorp (NYSE: ), Western Alliance (NYSE: ) and Regions Financial (NYSE: ) rose between 2.8% and 3%, while New York Community Bancorp (NYSE: ) traded 3.2% higher.

The Banks Index, which tracks large-cap banks, has gained 17.5 percent this year, compared with an 18 percent gain in the benchmark S&P 500. The KBW Regional Banking Index is up 4.4 percent over the same period.

Investor sentiment towards the sector was hit after three major players collapsed in early 2023, in part due to higher rates piling up unrealized losses on their loan books.

“(The cuts) will be credit positive for banks’ asset quality as lower rates make debt payments more affordable for borrowers with variable rate loans,” said Allen Tischler, senior vice president of the Financial Institutions Group at Moody’s (NYSE: ) Ratings.

However, lenders navigate a delicate economic environment. While investors expect the Fed to continue easing in the coming months, some have wondered if the central bank is behind the curve.

Fed Chairman Jerome Powell said, however, that he did not think the central bank had waited too long.