The banks are still not in the clear

Falling interest rates are usually good news for banks, especially when the cuts aren’t a harbinger of recession.

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

When the Federal Reserve cut its benchmark rate by half a percentage point last month, it signaled a turning point in its management of the economy and telegraphed its intention to cut rates by another two percentage points, according to the central bank’s forecast, boosting the outlook . for banks.

But the road likely won’t be smooth: lingering concerns about inflation could mean the Fed doesn’t cut rates as much as expected and Wall Street forecasts improvements in net interest income — the difference in what a bank earns by borrowing money. or investing in securities and what it pays depositors – may need to be withdrawn.

“The market is rallying on the fact that inflation appears to be reaccelerating and you’re wondering if the Fed is going to stop,” Chris Marinac, director of research at Janney Montgomery Scott, said in an interview. – This is my fight.

So when JPMorgan Chase start of bank earnings on 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 year-ago period.

While all banks are expected to eventually benefit from the Fed’s easing cycle, the timing and extent of that change is unknown, both based on the rate environment and the interplay of how sensitive a bank’s assets and liabilities are to the decline installments.

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

But for some banks, their assets will actually fall faster than their deposits in the early stages of the easing cycle, meaning their margins will be hit in the coming quarters, analysts say.

For big banks, NII will fall an average of 4 percent in the third quarter due to weak loan growth and a delay in revaluation of deposits, 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.

JPMorgan alarmed investors last month when its chairman said expectations for next year’s NII were too high, without elaborating. It’s a warning that other banks may be forced to give, according to analysts.

“Clearly, as rates come down, you have less pressure on rerating deposits,” JPMorgan Chairman Daniel Pinto told investors. “But as you know, we’re quite sensitive about goods.”

There are tradeoffs though. Lower rates are expected to help the Wall Street operations of big banks, as they tend to see higher transaction volumes when rates fall. Morgan Stanley analysts recommend holding Goldman Sachs, Bank of America and City Group for that reason, according to a Sept. 30 research note.

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

That’s why Morgan Stanley analysts upgraded their ratings on US Bank and The Zionists last month, while downgrading their recommendation on JPMorgan to neutral from overweight.

Bank of America and Wells Fargo have pulled back NII expectations over the course of this year, according to Portales Partners analyst Charles Peabody. That, along with the risk of higher-than-expected loan losses next year, could lead to a disappointing 2025, he said.

“I questioned the rate of acceleration in the NII that people were incorporating into their models,” Peabody said. “These are hard dynamics to predict, even if you’re the management team.”