Banks is not clear yet

Lower interest rates are usually good news for banks, especially when cuts are not a harbinger of a recession.

That's because lower interest rates will slow the flight of money that has occurred over the past two years as customers moved cash from checking accounts to higher-yielding options such as CDs and money market funds.

When the Federal Reserve cut its benchmark interest rate by half a percentage point last month, it signaled a turning point in its management of the economy and flagged its intention to cut interest rates by another full two percentage points, according to the central bank's forecast, boosting expectations. For banks.

But the ride probably won't be smooth: persistent concerns about inflation may mean the Fed won't cut interest rates as much as expected and Wall Street's expectations for improvements in net interest income — the difference in what a bank earns by lending money or investing in securities and what it pays to depositors — It may need to be reconnected.

“The market is bouncing based on the fact that inflation appears to be accelerating again, wondering whether we will see the Fed stop,” Chris Marinak, director of research at Janney Montgomery Scott, said in an interview. “This is my struggle.”

So when? JPMorgan Chase As banks begin reporting earnings on Friday, analysts will be seeking any guidance managers can provide on net interest income in the fourth quarter and beyond. The bank is expected to report earnings of $4.01 per share, a decrease of 7.4% from the same period last year.

While all banks are expected to eventually benefit from the Fed's easing cycle, the timing and extent of this shift are unknown, based on the price environment and the interaction between the sensitivity of a bank's assets and liabilities to lower interest rates.

Ideally, banks will enjoy a period where funding costs fall more quickly than returns on income-producing assets, boosting net interest margins.

But for some banks, their assets will actually decline faster than their deposits in the early stages of the easing cycle, meaning their margins will take a hit in the coming quarters, analysts say.

For large banks, National Insurance will fall by 4% on average in the third quarter due to tepid loan growth and a delay in deposit repricing, Goldman Sachs banking analysts led by Richard Ramsden said in an October 1 note. Deposit costs for large banks will still rise in the fourth quarter, the note said.

Last month, JP Morgan worried investors when its president said that National Insurance expectations next year were too high, without giving further details. It's a warning other banks may have to offer, according to analysts.

“Obviously with lower interest rates, you have less pressure on deposit repricing,” Daniel Pinto, head of JP Morgan, told investors. “But you know, we're very sensitive to assets.”

But there are compensations. Low interest rates are expected to help the Wall Street operations of major banks because they tend to see larger deal sizes when interest rates fall. Morgan Stanley analysts recommend owning it Goldman Sachs, Bank of America and Citigroup That's why, according to a September 30 research note.

Regional banks, which bore the brunt of the pressure from rising funding costs when interest rates were rising, were seen as the biggest beneficiaries of lower interest rates, at least initially.

That's why Morgan Stanley Analysts upgraded their ratings to Bank of the United States and Zion Last month, they lowered their recommendation on JPMorgan to Neutral from Overweight.

Bank of America and Wells Fargo have cut National Insurance forecasts throughout this year, according to Portalis Partners analyst Charles Peabody. This, combined with the risk of higher-than-expected loan losses next year, could lead to a disappointing 2025, he added.

“I've been wondering about the pace of densification at the NII that people have built into their models,” Peabody said. “These are difficult dynamics to predict, even if you are the management team.”