As the Federal Reserve shifts its monetary policy, banks' net interest income and margins are likely to face increasing pressure. According to Raymond James, the recent decision to lower the benchmark lending rate by 50 basis points to a range of 4.75% to 5% marks the first cut since March 2020. Following a period of tightening monetary policy from March 2022 through July 2023 to combat inflation, this adjustment signals a pivotal moment for the banking sector. Raymond James analysts, including David Long, warn that the immediate implications of rate cuts will manifest in lower lending rates on variable-rate loans, potentially squeezing net interest income and margins for numerous banks in the short term.
However, this policy easing is anticipated to alleviate deposit pricing pressures and enable lenders to reduce their funding costs. The firm projects total rate cuts amounting to 100 basis points this year, with another 100 expected in 2025. As the yield curve steepens its positive slope, analysts believe this will translate into better spreads on loans and deposits in the upcoming quarters. Recent comments from an FOMC voting member indicate a willingness to forgo a rate cut in the near future.
This could prompt some banking clients to secure loans now to circumvent the risk of potentially higher interest rates if the Federal Reserve does not implement further cuts. On the contrary, with the probability of continued lower rates and enhanced visibility on the operational landscape, loan growth is anticipated to pick up in 2025. Despite these forecasts, commercial loan growth is predicted to weaken in the near term due to a slowdown in the economy and diminished demand.
With many businesses remaining cautious as they approach the presidential election, the expectation is that loan growth will be modest for the majority of banks in the forthcoming third quarter. Interestingly, smaller, well-capitalized banks are projected to have engaged in share buybacks during the September quarter, although overall capital deployment has likely been constrained.
In recent earnings reports, JPMorgan Chase's ($JPM) third-quarter earnings unexpectedly increased year-over-year, with revenue exceeding market expectations, bolstered by robust performance in its investment banking division. Conversely, Wells Fargo ($WFC) posted a year-over-year decline in third-quarter results, but managed to surpass market estimates, thanks mainly to trading gains and increased investment banking fees contributing to higher noninterest income. Both financial giants demonstrated solid fundamental performances, according to Raymond James. As more earnings reports come in, Bank of America ($BAC), Goldman Sachs ($GS), Citigroup ($C), and Morgan Stanley ($MS) are all slated to announce results later this week. Overall, Raymond James expresses a positive outlook on bank stocks, emphasizing a favorable mix of risk-on banks and those exhibiting defense at a reasonable price.
The combination of a more dovish Federal Reserve, the anticipated steepening of the yield curve, and decreasing short-term rates are expected to bolster the credit outlook, despite some pressure on net interest margins. Analysts maintain a constructive view on certain liability-sensitive banks given the prospects of rate cuts in the fourth quarter and into 2025..