As the US banking sector gears up for third-quarter earnings season, investors are bracing for a potentially bumpy ride. The recent Federal Reserve rate cut has sparked concerns about the impact on the biggest banks’ profit margins. This week, JPMorgan Chase and Wells Fargo will kick off the earnings season, followed by Bank of America and Citigroup next week. Analysts predict that all four banks will report a decline in net profits compared to the previous quarter and year-ago period, largely due to the elevated rates that eroded lending margins.
However, the real question on everyone’s mind is how the Fed’s rate-cutting cycle will affect future margins. With borrowing costs on the decline, banks are already reducing lending rates, which could chip away at interest income. On the flip side, they may not have to pay as much to retain customer deposits, potentially lowering costs and boosting margins over time.
The uncertainty surrounding this dynamic has investors on edge, and they’ll be closely watching for any changes to future outlooks based on the Fed’s new rate path. Net interest income, which measures the difference between what banks earn on their assets and what they pay for deposits, will be a key metric to watch.
JPMorgan Chase, the industry’s largest bank, will be under particular scrutiny. Despite its impressive performance in 2023, driven by rising interest rates, the bank’s net interest income has been showing signs of pressure due to rising deposit costs. Executives have been tempering expectations, warning that the bank has been “over-earning.”
Some analysts are already adjusting their views on JPMorgan, citing concerns that the bank may benefit less from falling rates than its peers. Morgan Stanley recently downgraded JPMorgan from overweight to equal weight, citing the lender’s limited upside potential compared to rivals.
However, not everyone is pessimistic. Smaller regional banks, which saw their funding costs surge after the failures of Silicon Valley Bank and others, stand to benefit from falling deposit rates. According to KBW analysis, earnings growth for large regional lenders is expected to catch up to their bigger peers over the next year.
Ultimately, the impact of the Fed’s rate-cutting cycle on the banking industry remains uncertain. While some investors are anxious about the potential effects on profit margins, others believe that lower interest rates could ultimately be a boon for the sector, driving more dealmaking and boosting demand for new loans. As earnings season unfolds, one thing is clear: investors will be watching closely for any signs of how the banks will navigate this new rate environment.
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