Bank Stocks Cheer for Lower Rates: Opportunity and Risk for the Banking Sector
US bank stocks surged after the Federal Reserve indicated potential interest rate cuts in 2024. The S&P 500 bank index rose by 4.4%, reaching its highest level since March. $Wells Fargo & Co (WFC.US)$ and $Bank of America (BAC.US)$ Global Research also raised banking sector price targets following the Fed's announcement. The $KBW Nasdaq Bank Index (.BKX.US)$ and its Regional Bank counterpart $Spdr Series Trust S&P Regional Bkg Etf (KRE.US)$ have increased by 5.08% and 4.83%, respectively. Lenders such as $Citizens Financial (CFG.US)$, $Regions Financial (RF.US)$, and $Zions Bancorp (ZION.US)$ are among the top performers in the $S&P 500 Index (.SPX.US)$.
Why Bank Stocks Crushed the Market
Investors have been anxious about the Federal Reserve's effect on the economy, with concerns of it being late to respond to inflationary pressures and implementing interest-rate increases too quickly. Despite higher interest rates boosting lender profits, it can weaken loan demand and pressure banks to raise deposit rates for customers.
At the onset of QT, lenders were comfortable shedding deposits. That's because institutions had amassed trillions of dollars during the pandemic, they didn't mind seeing a lot of that leave once the Fed started raising interest rates in March 2022. In March 2023, the failure of California's Silicon Valley Bank and other institutions led to depositors pulling trillions from the banking system to shift to alternatives like money-market funds. Though the banking system has stabilized, they had to increase rates on certificates of deposit and other products to retain deposits at a cost. The rapid increase in interest rates caused damage to some areas of the economy, particularly in the financial sector. Customers withdrew their deposits to find higher-rate opportunities elsewhere, resulting in financial stocks suffering. Additionally, the steep rise in loan rates made bank customers hesitant to take out new loans.
However, on Wednesday, the Fed announced that interest rates will remain unchanged in December and will likely decrease in the near future, causing a rally that led to record highs for the $Dow Jones Industrial Average (.DJI.US)$ and other stock market indexes.
But lower rates are a double-edged sword for banks. On one hand, they reduce the cost of loans, thereby raising demand for such products. On the other, all things being equal, the profit they earn from those cheaper borrowings is lower. Bank sector bulls likely believe that high-volume lenders like Bank of America and $PNC Financial Services (PNC.US)$, with its large regional footprint, will benefit from that theoretical increased demand for loans.
What Analysts Say
• $Bank of America (BAC.US)$ Global Research's Ebrahim Poonawala states that despite outperforming the benchmark since October, the $KBW Nasdaq Bank Index (.BKX.US)$ is still trading at a 50% discount to the S&P 500. The index increased by 5.08% on Thursday and the recent move in interest rates due to Fed messaging could potentially attract more investors.
• Rick Meckler, partner at Cherry Lane Investments in New Jersey, noted that rate cuts could boost the economy and bank profitability, along with rallying stock and bond markets benefiting large bank segments like wealth management, capital markets, and credit. According to Meckler, banks are among underperforming sectors trying to catch up in the market.
• Margins for regional banks are expected to continue dropping in 2024, since rates will remain elevated even if Fed starts cutting.
I think you'll continue to see deposit costs go up for two to three quarters" after the Fed declares that it is done raising rates, Harris Simmons, the CEO of regional lender Zions , said last week at a conference in New York City.
• "The part of the cycle that we're not through yet is a slowing economy," said Wedbush bank analyst David Chiaverini, who anticipates a mild recession in 2024.
A specific worry is that commercial real estate could start producing major losses for regional banks, which are big financiers to office buildings across the US that emptied out during the pandemic and have not yet recovered pre-pandemic occupancy rates.
• "It is going to take some time for regional banks to repair their balance sheets," said Apollo's chief economist Torsten Slok in a recent note.
Source: REUTERS, Yahoo Finance, The Motley Fool
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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frank Buffalo_8169 : good tq
frank Buffalo_8169 : good tq