US bank stocks rise as jumbo rate cut eases default risk, cost concerns (updated)
19/09/2024 12:12
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Fed delivers 50-bps cut
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Lower rate expected to reduce deposit costs, aid borrowers
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TransUnion
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Regional banks also see gains as investor jitters abate
(Adds graphic on bank stock performance, analyst comment in
paragraph 10; updates prices throughout)
By Niket Nishant and Manya Saini
Sept 19 (Reuters) - U.S. bank stocks rose in premarket
trading on Thursday, a day after the Federal Reserve cut
interest rates by 50 basis points, which is expected to reduce
deposit costs and alleviate pressure on borrowers.
Elevated interest rates have weighed on loan growth and
consumer spending this year, while also increasing fears of
borrowers defaulting on their loans.
Commercial real estate loan portfolios have been under
immense pressure due to high rates and lack of demand for office
spaces, prompting banks to set aside billions as a cushion
against delinquencies.
"For banks, particularly those that hold mortgages and auto
loans, there may be a benefit to spreads in the near term," said
Charlie Wise, senior vice president and head of global research
and consulting at TransUnion.
Wells Fargo WFC.N led gains in large-cap bank stocks with
a 2% rise before the bell, followed closely by Citigroup C.N
and Bank of America BAC.N , which climbed 1.9% and
1.7%respectively.
JPMorgan JPM.N , the largest U.S. bank by assets and the
sector's bellwether, was last trading 1.3% higher. Investment
banks Goldman Sachs GS.N and Morgan Stanley MS.N were also
up more than 1.5% in thin premarket trade.
REFINANCING WINDOW
Most auto loans and mortgages carry a fixed rate of
interest, which means banks will continue to fetch higher yields
even after the cut.
Borrowers looking for immediate relief could also refinance
their loans and negotiate better repayment terms, lowering the
risk of defaults. Top banks echoed the Fed's move and reduced
their prime lending rates on Wednesday, giving consumers an
immediate reprieve on borrowing costs.
Regional banks are expected to benefit more from rate cuts,
compared with their larger rivals, as elevated deposit costs
normalize and the demand for loans recovers.
"We expect a lower funds rate to ignite commercial borrower
demand for loans," said J.P. Morgan analyst Steven Alexopoulos.
"The Fed cut reduces uncertainty over the borrowing costs and
the economy."
Banc of California BANC.N led gains in regional banks with
a 4.2% rise before the bell. KeyCorp KEY.N , Western Alliance
WAL.N and Regions Financial RF.N rose between 2.8% and 3%,
while New York Community Bancorp NYCB.N traded 3.2% higher.
The S&P 500 Banks Index .SPXBK , which tracks large-cap
banks, has gained 17.5% this year, compared with an 18% gain in
the benchmark S&P 500 .SPX . The KBW Regional Banking Index
.KRX is up 4.4% over the same period.
Investor sentiment toward the sector had taken a hit after
three major players collapsed in early 2023, in part due to
higher rates racking up unrealized losses on their loan books.
"(The cuts) will be credit positive for banks' asset quality
because lower rates make debt payments more affordable for
borrowers with floating-rate loans," said Allen Tischler, senior
vice president of Financial Institutions Group at Moody's
Ratings.
Still, lenders are maneuvering a delicate economic
environment. While investors expect the Fed to continue easing
in the coming months, some have questioned if the central bank
is behind the curve.
Fed Chair Jerome Powell said, however, that he doesn't
believe the central bank waited too long.
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US bank stocks underperform benchmark https://reut.rs/3Bjj1IV
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(Reporting by Manya Saini and Niket Nishant in Bengaluru;
Editing by Shailesh Kuber)
((Manya.Saini@thomsonreuters.com; X: manya__saini;))