Banks are not transparent yet

Lower interest rates are usually good news for banks, especially if the cuts are not a sign of a recession.

That’s because lower rates will slow the migration of money that has occurred over the past two years as customers move cash out of checking accounts and into 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 shift in its economic management and signaled its intention to cut rates by another full two percent, according to central bank projections, raising expectations. banks.

But the ride probably won’t be smooth: Continued concerns about inflation could mean the Fed isn’t cutting rates as expected and Wall Street forecasts for improved net interest income — the difference in what banks earn by lending money. or investing in securities and what pays depositors – may require a phone call.

“The market is reeling from the fact that inflation looks like it’s picking up again, and you’re wondering if we’re going to see a Fed stance,” Chris Marinac, director of research at Janney Montgomery Scott, said in an interview. “That’s my struggle.”

So when JPMorgan Chase begins bank earnings on Friday, analysts will be looking for any guidance management can provide on net profit for the fourth quarter and beyond. The bank is expected to report $4.01 per share in earnings, down 7.4% from the prior period.

Although all banks are expected to eventually benefit from the Fed’s easing cycle, the timing and magnitude of that change is unknown, based on both the rate situation and the interaction between the sensitivity of the bank’s assets and liabilities to declining rates.

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

But for some banks, their assets will decline faster than their deposits at the start of the easing cycle, meaning their margins will be fine in the coming quarters, analysts said.

At major banks, the NII will fall by 4% on average in the third quarter due to faster loan growth and lower deposit prices, Goldman Sachs banking analysts led by Richard Ramsden said in an Oct. 1. Deposit costs for major banks will still rise in the fourth quarter, the note said.

Last month, JPMorgan spooked investors when its president said NII expectations for next year were too high, without providing further details. It’s a warning other banks may be forced to give, according to analysts.

“Obviously, as rates go down, you have less pressure to call back deposits,” JPMorgan President Daniel Pinto told investors. “But as you know, we are very sensitive.”

There are offsets, though. The lower rates are expected to help Wall Street’s performance of the big banks because they tend to see bigger deals when rates drop. Morgan Stanley analysts recommend owning Goldman Sachs, Bank of America again Citigroup for that reason, according to a Sept. 30 research note.

Regional banks, burdened by pressure from higher funding costs when rates rise, are seen as the biggest beneficiaries of falling rates, at least initially.

that’s why Morgan Stanley analysts upgraded their ratings to Bank of the US again The Zionists last month, when they cut their recommendation on JPMorgan to neutral from overweight.

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

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