Finance

Banks aren’t in the clear just yet

Published

1 month ago

October 10, 2024

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.

Last month, JPMorgan alarmed investors when its president said that expectations for NII next year were too high, without giving further details. It’s a warning that other banks may be forced to give, according to analysts.

“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.”

Don’t miss these insights from CNBC PRO

Finance

Morgan Stanley picks China stocks to ride out a worst-case scenario in U.S. tensions

Published

14 hours ago

November 17, 2024

Business Finance News

Finance

Elon Musk endorses Trump’s transition co-chair Howard Lutnick for Treasury secretary

Published

1 day ago

November 16, 2024

Business Finance News

Elon Musk at the tenth Breakthrough Prize ceremony held at the Academy Museum of Motion Pictures on April 13, 2024 in Los Angeles, California.

The Hollywood Reporter | The Hollywood Reporter | Getty Images

On Saturday, Elon Musk shared who he is endorsing for Treasury secretary on X, a cabinet position President-elect Donald Trump has yet to announce his preference to fill.

Musk wrote that Howard Lutnick, Trump-Vance transition co-chair and CEO and chairman of Cantor Fitzgerald, BGC Group and Newmark Group chairman, will “actually enact change.”

Lutnick and Key Square Group founder and CEO Scott Bessent are reportedly top picks to run the Treasury Department.

Musk, CEO of Tesla and SpaceX, also included his thoughts on Bessent in his post on X.

“My view fwiw is that Bessent is a business-as-usual choice,” he wrote.

“Business-as-usual is driving America bankrupt so we need change one way or another,” he added.

Musk also stated it would be “interesting to hear more people weigh in on this for @realDonaldTrump to consider feedback.”

Howard Lutnick, chairman and chief executive officer of Cantor Fitzgerald LP, left, and Elon Musk, chief executive officer of Tesla Inc., during a campaign event with former US President Donald Trump, not pictured, at Madison Square Garden in New York, US, on Sunday, Oct. 27, 2024.

Bloomberg | Bloomberg | Getty Images

In a statement to Politico, Trump transition spokesperson Karoline Leavitt made it clear that the president-elect has not made any decisions regarding the position of Treasury secretary.

“President-elect Trump is making decisions on who will serve in his second administration,” Leavitt said in a statement. “Those decisions will be announced when they are made.”

Both Lutnick and Bessent have close ties to Trump. Lutnick and Trump have known each other for decades, and the CEO has even hosted a fundraiser for the president-elect.

The Wall Street Journal also reported that Lutnick has already been helping Trump review candidates for cabinet positions in his administration.

On the other hand, Bessent was a key economic advisor to the president-elect during his 2024 campaign. Bessent also received an endorsement from Republican Senator Lindsey Graham of South Carolina, according to Semafor.

“He’s from South Carolina, I know him well, he’s highly qualified,” Graham said.

Finance

Protecting your portfolio against risks tied to Trump’s tariff plan

Published

1 day ago

November 16, 2024

Business Finance News

Biggest Risks After the Rally: Trade & Top Valuations

Money manager John Davi is positioning for challenges tied to President-elect Donald Trump’s tariff agenda.

Davi said he worries the new administration’s policies could be “very inflationary,” so he thinks it is important to choose investments carefully.

“Small-cap industrials make more sense than large-cap industrials,” the Astoria Portfolio Advisors CEO told CNBC’s “ETF Edge” this week.

Davi, who is also the firm’s chief investment officer, expects the red sweep will help push a pro-growth, pro-domestic policy agenda forward that will benefit small caps.

It appears Wall Street agrees so far. Since the presidential election, the Russell 2000 index, which tracks small-cap stocks, is up around 4% as of Friday’s close.

Davi, whose firm has $1.9 billion in assets under management, also likes staying domestic despite the tariff risks.

“We’re overweight the U.S. I think that’s the right playbook in the next few years until the midterms,” added Davi. “We have two years of where he [Trump] can control a lot of the narrative.”

But Davi plans to stay away from fixed income due to challenges tied to the growing budget deficit.

“Be careful if you own bonds for sure,” said Davi.

Since the election, the benchmark 10-year Treasury yield is up 3% as of Friday’s close.