The Federal Reserve starts interest rate cut cycle. Is it the "good days" for the US banking industry?

Intelligent Finance APP noticed that a rate cut is usually good news for banks, especially when the rate cut is not a sign of economic recession. This is because lower rates will slow down the flow of funds from checking accounts to higher-yielding options such as CDs and money market funds that customers have been moving to over the past two years.

According to the Fed's forecast, the Fed cut its benchmark interest rate by 0.5 percentage points last month, marking a turning point in its economic management and signaling its intention to cut rates by a full two percentage points to boost the prospects for banks.

However, this process may not be smooth sailing: ongoing concerns about inflation may mean that the Fed will not cut rates as significantly as expected, and Wall Street's expectations for improvement in Net Interest Income (NII) may need to be adjusted downward.

Chris Marinac, research director at Janney Montgomery Scott, said in an interview, "Based on the fact that inflation seems to be accelerating again, the market is rebounding, and you wonder if the Fed will pause its rate hikes."

Therefore, when JPMorgan Chase announces its banking performance on Friday, analysts will be looking for any guidance from management on Net Interest Income for the fourth quarter and beyond. The bank is expected to announce earnings per share of $4.01, a 7.4% decrease from the same period last year.

Not Yet Out of the Woods

While it is expected that all banks will eventually benefit from the Fed's easing cycle, the timing and extent of this transition are still unclear, depending on the interplay between the rate environment and the sensitivity of bank assets and liabilities to rate cuts.

Ideally, banks will enjoy a period where the decline in funding costs outpaces the asset yield, thereby increasing their net interest margin.

However, analysts say that for some banks, in the early stages of the easing cycle, the repricing of their assets will actually outpace deposits, meaning their profit margins will be hit in the coming quarters.

Lead Goldman Sachs analyst Richard Ramsden said in a report on October 1 that due to tepid loan growth and lagging deposit repricing, net income for large banks in the third quarter will average a 4% decline. The report stated that deposit costs for large banks are expected to rise in the fourth quarter.

Last month, JPMorgan Chase's CEO said that expectations for NII next year were too high, but did not provide further details, which shocked investors. Analysts say that other banks may also be forced to issue such warnings.

JPMorgan Chase's CEO Daniel Pinto told investors, "Clearly, as rates fall, the pressure to reprice deposits will decrease." "But you know, we are quite sensitive to assets."

However, there are also offsets. Lower rates are expected to benefit the Wall Street businesses of large banks, as they often see increased trading volumes when rates fall. According to a research report on September 30, Morgan Stanley analysts therefore recommended holding stocks of Goldman Sachs, Bank of America, and Citigroup.

Optimism for Regional Banks

Regional banks are the first to bear the brunt of rising interest rates, as they are seen as the greater beneficiaries of falling rates, at least initially.

This is why Morgan Stanley analysts raised their ratings on US Bank and Zion Bank last month, while downgrading JPMorgan Chase's rating from overweight to neutral.

Portales Partners analyst Charles Peabody said that Bank of America and Wells Fargo have been lowering their expectations for NII this year. He said that, coupled with the risk of loan losses higher than expected next year, 2025 could be disappointing.

Peabody said: "I have been questioning the built-in speed of NII growth in people's models." "These dynamics are hard to predict, even if you are a management team."