US bank stocks soared on Thursday as investors reacted positively to the Federal Reserve's decision to lower the federal funds rate by 50 basis points.
The cut, which brings the target range to 4.75-5.00%, marks the start of a new monetary easing cycle aimed at supporting the economy. Despite Fed Chair Jerome Powell's assurances that the US economy remains strong, the move was seen as a preemptive measure to prevent any potential downturns.
Leading financial institutions, including Goldman Sachs (GS), Capital One, and Citigroup (C), all witnessed stock price increases exceeding 3%, while smaller gains were recorded by major banks like Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Morgan Stanley (MS). The KBW Nasdaq Bank Index, along with indexes tracking large and midsize regional banks, rose by approximately 2%, reflecting widespread investor confidence.
Soft Landing Hopes Drive Optimism
The recent rate cut has sparked hopes for a repeat of the 1995 soft landing, a period marked by robust economic growth and prosperity for banks following the beginning of a rate-cutting cycle. Investors are optimistic that the current policy shift could lead to a similar multiyear period of growth for the banking sector.
However, the situation is more complex this time around. A crucial indicator for banks’ profitability is their net interest income—the margin left after paying depositors. Moody’s Ratings warned that lower rates could initially be detrimental to most banks, as deposit costs are expected to decrease more slowly than loan yields, squeezing this crucial revenue source.
Despite the short-term challenges, some analysts believe lower rates could ultimately benefit banks by prolonging economic growth and improving asset quality. RBC Capital Markets analyst Gerard Cassidy suggests that while banks might need to set aside higher provisions for potential loan losses in the short term, they could still see “better earnings” by 2025 as the economy stabilizes.
The recent rate cut has sparked hopes for a repeat of the 1995 soft landing, a period marked by robust economic growth and prosperity for banks following the beginning of a rate-cutting cycle. Investors are optimistic that the current policy shift could lead to a similar multiyear period of growth for the banking sector.
However, the situation is more complex this time around. A crucial indicator for banks’ profitability is their net interest income—the margin left after paying depositors. Moody’s Ratings warned that lower rates could initially be detrimental to most banks, as deposit costs are expected to decrease more slowly than loan yields, squeezing this crucial revenue source.
Despite the short-term challenges, some analysts believe lower rates could ultimately benefit banks by prolonging economic growth and improving asset quality. RBC Capital Markets analyst Gerard Cassidy suggests that while banks might need to set aside higher provisions for potential loan losses in the short term, they could still see “better earnings” by 2025 as the economy stabilizes.
Regional Banks Set to Benefit
Regional banks, particularly those with significant exposure to commercial real estate, could be among the immediate beneficiaries of the Fed’s rate cut. The aggressive rate-tightening campaign of the past few years, combined with increased urban property vacancies post-pandemic, has strained these institutions. Lower rates are expected to stimulate demand from commercial borrowers, reducing economic uncertainty and offering relief to these lenders.
According to JPMorgan analyst Steven Alexopoulos, the sector is “poised for re-valuation” as the rate cuts ease financial conditions and encourage borrowing. While the long-term impact on the financial sector remains uncertain, the current market sentiment suggests that investors are betting on a brighter future for banks as the Fed shifts towards a more accommodative stance.
Regional banks, particularly those with significant exposure to commercial real estate, could be among the immediate beneficiaries of the Fed’s rate cut. The aggressive rate-tightening campaign of the past few years, combined with increased urban property vacancies post-pandemic, has strained these institutions. Lower rates are expected to stimulate demand from commercial borrowers, reducing economic uncertainty and offering relief to these lenders.
According to JPMorgan analyst Steven Alexopoulos, the sector is “poised for re-valuation” as the rate cuts ease financial conditions and encourage borrowing. While the long-term impact on the financial sector remains uncertain, the current market sentiment suggests that investors are betting on a brighter future for banks as the Fed shifts towards a more accommodative stance.
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