Although the Fed has decided to lower interest rates, banks still face uncertainties.

• Banks benefit from falling interest rates, especially when the decrease is not a sign of an impending economic downturn.
• The Fed may not cut rates as much as expected due to persistent concerns over inflation, and Wall Street's projections for improvements in net interest income may need to be adjusted.
• The timing and magnitude of the shift in the Fed's easing cycle that will benefit all banks is uncertain, depending on the rate environment and the sensitivity of a bank's assets and liabilities to falling rates.

Banks benefit from falling interest rates, especially when the decrease is not a sign of an impending economic downturn.

The migration of money that has occurred over the past two years will be slowed by lower rates as customers shift their cash from checking accounts to higher-yielding options like CDs and money market funds.

The Federal Reserve's decision to reduce its benchmark rate by half a percentage point last month marked a significant shift in its management of the economy and indicated its plan to lower rates by an additional two full percentage points, as per its projections, thereby improving the prospects for banks.

The Fed may not cut rates as much as expected due to persistent concerns over inflation, and Wall Street's projections for improvements in net interest income may need to be adjusted.

"Chris Marinac, research director at Janney Montgomery Scott, stated in an interview that the market is fluctuating due to the possibility of inflation reaccelerating, and he wonders if the Fed will pause. He expressed his struggle with this situation."

On Friday, when the bank reports its earnings, analysts will be looking for any information from managers regarding net interest income in the upcoming quarters. The bank is predicted to earn $4.01 per share, which represents a 7.4% decline from the previous year.

Known unknowns

The timing and magnitude of the shift in the Fed's easing cycle that will benefit all banks is uncertain, depending on the rate environment and the sensitivity of a bank's assets and liabilities to falling rates.

Banks will benefit from a situation where funding costs decrease more rapidly than the returns on income-generating assets, resulting in higher net interest margins.

In the early stages of the easing cycle, some banks may experience a faster repricing of their assets than their deposits, resulting in a decrease in their margins, according to analysts.

According to Goldman Sachs banking analysts, led by Richard Ramsden, the net interest income (NII) of large banks will decrease by an average of 4% in the third quarter due to slow loan growth and a delay in deposit repricing. The note also states that deposit costs for large banks will continue to increase into the fourth quarter.

JPMorgan's president cautioned investors last month about the high expectations for NII next year, without providing additional information. This warning may be echoed by other banks, predicts analysts.

"JPMorgan President Daniel Pinto informed investors that as interest rates decrease, there is less pressure to adjust deposit pricing. However, he emphasized that the bank is highly sensitive to asset values."

Big banks' Wall Street operations are expected to benefit from lower rates, as they tend to see higher deal volumes during such times. Morgan Stanley analysts recommend owning both stocks for this reason, as stated in a Sept. 30 research note.

Regional optimism

Banks that experienced higher funding costs during rising rates may benefit more from falling rates, at least in the short term.

While analysts upgraded their ratings on and last month, they cut their recommendation on JPMorgan from overweight to neutral.

Charles Peabody, an analyst at Portals Partners, stated that Bank of America and Wells Fargo have lowered their expectations for NII this year. Additionally, the possibility of higher-than-anticipated loan losses in 2025 could result in a disappointing year, according to Peabody.

"Peabody questioned the accuracy of the predicted pace of NII ramp-up in models built by others, stating that these dynamics are challenging to predict, even for management teams."