Evercore ISI: These banking stocks may outperform when the Federal Reserve enters an easing cycle
Evercore ISI analyst John Pancari pointed out that when the Federal Reserve may enter a loose cycle, Signature Bank, Truist Financial, US Bancorp, and Fifth Third Bancorp may outperform. The NII situation of these banks is more complex in a rate-cutting scenario, and banks' sensitivity to interest rates and effective asset-liability management has improved. Currently, market expectations of rate cuts and concerns about economic recession have intensified focus on liability-sensitive and defensive bank stocks
According to the Zhitong Finance APP, when the Federal Reserve raises interest rates, banks' Net Interest Income (NII) usually increases. Therefore, when the central bank shifts to loose monetary policy, banks' NII naturally decreases. However, Evercore ISI analyst John Pancari explained in a recent report to clients that the actual situation is much more complex.
The analyst used the latest Asset and Liability Management Committee (ALCO) disclosure information in the model to help assess which banks are best suited for rate cuts. "However, ALCO scenarios are just part of the story, as they are typically based on the basic static balance sheet and do not include balance sheet restructuring or potential changes in hedging investment portfolios (although this approach is evolving)," he wrote.
Therefore, Pancari created a more dynamic approach, adding management commentary on interest rate sensitivity, 2024 fiscal year NII guidance, and assuming that each bank will cut rates to provide a more complete overview.
His basic argument is that as the Federal Reserve restructures balance sheets, restructures securities, and takes hedging measures, banks' "sensitivity to assets gradually decreases."
He concluded, "In short, hedging efforts have also made progress, coupled with the increase in announced and completed securities restructuring, the actual sensitivity of banks may support positions with lower asset sensitivity/higher liability sensitivity than indicated by ALCO scenarios."
Pancari stated that from the perspective of NII, Comerica Bank (CMA.US), Truist Financial (TFC.US), US Bancorp (USB.US), and Fifth Third Bancorp (FITB.US) seem to be in the best position.
Federal Reserve Chairman Powell's dovish remarks and the lower-than-expected July employment report have prompted a market pricing shift towards a 100 basis point rate cut. Pancari wrote that, coupled with increasing concerns about worsening economic recession, "prompting the market to turn to liability-sensitive and those seen as defensive in the credit cycle bank stocks." However, with more encouraging economic data released in the past week, this trend has reversed, and the market now expects a 75 basis point rate cut in 2024.
The analyst stated that the best-performing bank stocks are those with the lowest asset sensitivity/highest liability sensitivity, including Comerica Bank, Truist Financial, Fifth Third Bancorp, and US Bancorp, as well as defensive positions such as American Express (AXP.US) and JPMorgan Chase (JPM.US).
However, if the extent of economic deterioration exceeds expectations, credit concerns may outweigh NII concerns, "resulting in a more severe impact on stock market performance," Pancari added