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U.S. bank earnings season is upon us, and with market expectations for the number of interest rate cuts halved since the start of 2024, some lenders are expected to implement substantial revisions to their outlook for income from net interest (“NII”) to reflect the new macroeconomic context.
A months-long standoff between the market and the Federal Reserve has come to an end, as much of the economic data so far this year has reinforced the need for caution from the monetary authority. In January, federal funds futures traders had forecast rate cuts of six to seven quarter points by the end of 2024. Now, with inflation proving stickier than expected, traders see three reductions starting from June or July, in line with the central bank’s median projection. released earlier this month.
“Overall, fewer rate cuts are a boon to the NII outlook for most large-cap banks and a headwind for several mid-cap banks,” Morgan Stanley analyst Manan Gosalia wrote in a recent note. This is because, he added, large banks have higher asset returns and slight incremental pressure on deposit prices, while mid-cap banks have faced higher funding costs and deposit price pressures over the cycle. Fed rate hike in 2022 and 2023.
Higher rates for a longer period could generally be a boon for banks (depending on their size), as long as they get higher rates from borrowers while keeping deposit rates relatively low. Beyond the NII, however, higher rates could lead to more loan losses as both consumers and businesses struggle to keep up with higher borrowing costs.
Gosalia is very optimistic about the potential upside of NII – the amount of interest banks receive from assets minus what they pay on their debts – for Bank of America’s revenue outlook (NYSE:BAC), Highway (NYSE:STT) and Wells Fargo (NYSE:WFC). On the other side of the fence, he sees the most downside risk for Valley National Bancorp (NASDAQ:VLY), Cadence Bank (NYSE:CADE) and Quinto Terzo Bancorp (NASDAQ:FITB).
Wells Fargo (WFC) has already seen NII decline Y/Y in Q4 2023, with further weakness expected this year. JP Morgan (New York Stock Exchange: JPM), the largest U.S. bank, saw its NII rise 19.1% during the period, although the 2024 level is expected to be broadly stable compared to 2023.
On Bank of America (BAC), in particular, the lender “benefits from high asset sensitivity (which helps given the 3 fewer cuts in the current forward curve compared to previous guidance), the high liquidity position, the low loan-to-deposit ratio (“LDR”) and a strong low-cost core deposit base,” Gosalia said, which is 2% above Wall Street’s estimate for BAC’s 2024 NII. Wells Fargo (WFC) and State Street (STT) also benefit from asset sensitivity, she added.
Valley National (VLY), Cadence Bank (CADE) and Fifth Third (FITB) all have one thing in common: a high loan-to-deposit ratio, the note said, meaning they made a large amount of loans relative to their deposits, a sign of reduced liquidity and increased risk of running out of funds to meet customer withdrawals.
Not all banks are likely to update guidance next month, the analyst noted, as “management teams don’t want to chase the forward curve throughout the year.”
Take a look at how the SA Quant system ranks US diversified and regional banks.