Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024. REUTERS/Tom Brenner
Tom Brenner | Reuters
Falling interest rates are usually good news for banks, especially when the cuts aren’t a harbinger of recession.
That’s because lower rates will slow the migration of money that’s happened over the past two years as customers shifted cash out of checking accounts and into higher-yielding options like CDs and money market funds.
When the Federal Reserve cut its benchmark rate by half a percentage point last month, it signaled a turning point in its stewardship of the economy and telegraphed its intention to reduce rates by another 2 full percentage points, according to the Fed’s projections, boosting prospects for banks.
But the ride probably won’t be a smooth one: Persistent concerns over inflation could mean the Fed doesn’t cut rates as much as expected and Wall Street’s projections for improvements in net interest income — the difference in what a bank earns by lending money or investing in securities and what it pays depositors — may need to be dialed back.
“The market is bouncing around based on the fact that inflation seems to be reaccelerating, and you wonder if we will see the Fed pause,” said Chris Marinac, research director at Janney Montgomery Scott, in an interview. “That’s my struggle.”
So when JPMorgan Chase kicks off bank earnings on Friday, analysts will be seeking any guidance that managers can give on net interest income in the fourth quarter and beyond. The bank is expected to report $4.01 per share in earnings, a 7.4% drop from the year-earlier period.
Known unknowns
While all banks are expected to ultimately benefit from the Fed’s easing cycle, the timing and magnitude of that shift is unknown, based on both the rate environment and the interplay between how sensitive a bank’s assets and liabilities are to falling rates.
Ideally, banks will enjoy a period where funding costs fall faster than the yields on income-generating assets, boosting their net interest margins.
But for some banks, their assets will actually reprice down faster than their deposits in the early innings of the easing cycle, which means their margins will take a hit in the coming quarters, analysts say.
For large banks, NII will fall by 4% on average in the third quarter because of tepid loan growth and a lag in deposit repricing, Goldman Sachs banking analysts led by Richard Ramsden said in an Oct. 1 note. Deposit costs for large banks will still rise into the fourth quarter, the note said.
“Clearly, as rates go lower, you have less pressure on repricing of deposits,” JPMorgan President Daniel Pinto told investors. “But as you know, we are quite asset sensitive.”
There are offsets, however. Lower rates are expected to help the Wall Street operations of big banks because they tend to see greater deal volumes when rates are falling. Morgan Stanley analysts recommend owning Goldman Sachs, Bank of America and Citigroup for that reason, according to a Sept. 30 research note.
Regional optimism
Regional banks, which bore the brunt of the pressure from higher funding costs when rates were climbing, are seen as bigger beneficiaries of falling rates, at least initially.
That’s why Morgan Stanley analysts upgraded their ratings on US Bank and Zions last month, while cutting their recommendation on JPMorgan to neutral from overweight.
Bank of America and Wells Fargo have been dialing back expectations for NII throughout this year, according to Portales Partners analyst Charles Peabody. That, in conjunction with the risk of higher-than-expected loan losses next year, could make for a disappointing 2025, he said.
“I’ve been questioning the pace of the ramp up in NII that people have built into their models,” Peabody said. “These are dynamics that are difficult to predict, even if you are the management team.”
Check out the companies making headlines before the bell. Cisco Systems — The networking technology stock added nearly 2% on the heels of a Citi upgrade to buy from neutral. Citi said artificial intelligence can become a bigger part of the business over time. Novocure — Shares soared roughly 22% after the U.S. Food and Drug Administration approved Novocure’s Optune Lua wearable treatment for metastatic non-small cell lung cancer. Morgan Stanley — Shares gained more than 3% after the bank reported quarterly results before the bell that beat Wall Street’s forecasts, helped by higher-than-expected revenue from its wealth management, trading and investment banking operations. The firm’s earnings came in at $1.88 per share, versus the $1.58 expected by a LSEG analyst poll. Revenue was $15.38 billion versus the $14.41 billion consensus estimate. United Airlines — Shares rose about 1% after the airline beat earnings and revenue expectations for the third quarter. United also announced a $1.5 billion share buyback, its first since before the pandemic. ASML — Shares of the Dutch chip equipment firm slid 4% before the bell, adding to Tuesday’s losses after it accidently released its third-quarter results a day early . The report was disappointing as ASML cut its 2025 sales forecast, suggesting weakness in markets other than those that serve AI applications. J.B Hunt Transport Services — Shares jumped more than 7% after the company’s third-quarter results topped expectations. J.B. Hunt posted $1.49 earnings per share on $3.07 billion of revenue. Analysts polled by LSEG had forecast earnings of $1.41 per share on $3.02 billion of revenue. The company said demand for its intermodal service rose throughout the quarter. — CNBC’s Sean Conlon, Alex Harring, Sarah Min, Michelle Fox and Hakyung Kim contributed reporting.
Ted Pick, CEO Morgan Stanley, speaking on CNBC’s Squawk Box at the World Economic Forum Annual Meeting in Davos, Switzerland on Jan. 18th, 2024.
Adam Galici | CNBC
Morgan Stanley topped analysts’ estimates for third quarter profit as its wealth management, trading and investment banking operations generated more revenue than expected.
Here’s what the company reported:
Earnings:$1.88 a share vs $1.58 LSEG estimate
Revenue: $15.38 billion vs. $14.41 billion estimate
Morgan Stanley had several tailwinds in its favor. The bank’s massive wealth management business was helped by high stock market values in the quarter, which inflates the management fees the bank collects.
Investment banking has rebounded after a dismal 2023, a trend that may continue as easing rates will encourage more financing and merger activity.
Finally, its Wall Street rivals have posted better-than-expected trading results, making it unlikely that the firm missed out on elevated activity.
Chinese e-commerce company Alibaba has invested heavily in its fast-growing international business as growth slows for its China-focused Taobao and Tmall business.
Nurphoto | Nurphoto | Getty Images
BEIJING — Chinese e-commerce giant Alibaba‘s international arm on Wednesday launched an updated version of its artificial intelligence-powered translation tool that, it says, is better than products offered by Google, DeepL and ChatGPT.
Alibaba’s fast-growing international unit released the AI translation product as an update to one unveiled about a year ago, which it says already has 500,000 merchant users. Sellers based in one country can use the translation tool to create product pages in the language of the target market.
The new version is based only on large language models, allowing it to draw on contextual clues such as culture or industry-specific terms, Kaifu Zhang, vice president of Alibaba International Digital Commerce Group and head of the business’ artificial intelligence initiative, told CNBC in an interview Tuesday.
“The idea is that we want this AI tool to help the bottom line of the merchants, because if the merchants are doing well, the platform will be doing well,” he said.
Large language models power artificial intelligence applications such as OpenAI’s ChatGPT, which can also translate text. The models, trained on massive amounts of data, can generate humanlike responses to user prompts.
Alibaba’s translation tool is based on its own model called Qwen. The product supports 15 languages: Arabic, Chinese, Dutch, English, French, German, Italian, Japanese, Korean, Polish, Portuguese, Russian, Spanish, Turkish and Ukrainian.
Zhang said he expects “substantial demand” for the tool from Europe and the Americas. He also expects emerging markets to be a significant area of use.
When users of Alibaba.com — a site for suppliers to sell to businesses — are categorized by country, developing countries account for about half of the top 20 active AI tool users, Zhang said.
Chinese companies have increasingly looked abroad for growth opportunities, especially e-commerce merchants. PDD Holdings‘ Temu, fast fashion seller Shein and ByteDance’s TikTok are among the recent global market entrants. Many China-based merchants also sell on Amazon.com.
Zhang declined to share how much the updated version would cost. He said it was included in some service bundles for merchants wanting simple exposure to overseas users.
His thinking is that contextual translation makes it much more likely that consumers decide to buy. He shared an example in which a colloquial Chinese description for a slipper would have turned off English-speaking consumers if it was only translated literally, without getting at the implied meaning.
“The updated translation engine is going to make Double 11 a better experience for consumers because of more authentic expression,” Zhang said, in reference to the Alibaba-led shopping festival that centers on Nov. 11 each year.
Alibaba’s international business includes platforms such as AliExpress and Lazada, which primarily targets Southeast Asia. The international unit reported sales growth of 32% to $4.03 billion in the quarter ended June from a year ago.
That’s in contrast to a 1% year-on-year drop in sales to $15.6 billion for Alibaba’s main Taobao and Tmall e-commerce business, which has focused on China.
Nomura analysts expect that Alibaba’s international revenue slowed slightly to 29% year-on-year growth in the quarter ended September, while operating losses narrowed, according to an Oct. 10 report. Alibaba has yet to announce when it will release quarterly earnings.