Sept 19 (Askume) – U.S. bank stocks rose on Thursday after the Federal Reserve cut interest rates by 50 basis points , raising expectations that the central bank will lower deposit costs and ease borrower pressure.
Banks have set aside billions of dollars to protect against potential borrower defaults, particularly in commercial real estate (CRE) portfolios, where a collapse in demand for office space has created significant pressure.
“For banks, particularly those servicing mortgages and auto loans, spreads are likely to benefit in the short term,” said Charlie Wise, senior vice president and global head of research and consulting at TransUnion.
Wells Fargo (WFC.N) rose 3%, while asset and industry-leading U.S. bank JPMorgan Chase (JPM.N) rose 1%.
Citigroup (CN) and Bank of America (BAC.N) rose 2.6% and 2.3%, respectively.
Wall Street giant Goldman Sachs (GSN) rose 3%, while rival Morgan Stanley gained 1.3%.
Refinance Window
Top banks cut key lending rates on Wednesday in support of the Federal Reserve’s move , but most auto loans and mortgages charge fixed rates, meaning they will have to pay higher rates on such loans even after the cut.
Nevertheless, borrowers seeking immediate relief can refinance their loans and negotiate better repayment terms, thereby reducing the risk of default.
“The Fed’s interest rate cuts have reduced borrowing costs and economic uncertainty,” said JPMorgan analyst Steven Alexopoulos.
“We expect lower funding rates to boost loan demand from commercial borrowers.”
Regional banks are expected to benefit more from rate cuts than their larger rivals because they have greater exposure to commercial real estate.
Shares of Valley National (VLY.O) , Banc of California (BANC.N) , KeyCorp (KEY.N) and Western Alliance (WAL.N) rose about 3.8%.
Analysts at Jefferies said: “The initial positive reaction on the bank index was understandable as the 50 basis point rate cut eased senior credit concerns.”
Alan Tishler, senior vice president at Moody’s Ratings Financial Institutions Group, also said the rate cut would have a “positive impact on asset quality, as lower rates make floating-rate loan lending more affordable to borrowers.”
Still, lenders are operating in a fragile economic environment. While investors expect the Fed to continue easing in the coming months, some question whether the central bank is behind the curve.
Sentiment in the banking sector also took a hit when three major banks collapsed in early 2023, in part because of unrealized losses on their portfolios due to high interest rates.
The KBW Regional Bank Index (.KRX) is up 4.4% this year from its previous close, while the benchmark S&P 500 Index (.SPX) is up 18%.
The S&P 500 Bank Index (.SPXBK) , which tracks big banks, gained 17.5% during the same period.
“(The rate cut) raises questions about the underlying economy and whether the recession the Fed is envisioning is actually getting worse,” Jefferies said.
