Richard Drury
When the Federal Reserve raises interest rates, banks’ net interest income typically increases, so it makes sense that as the central bank eases policy, banks’ net interest income would fall.
But the reality is more complicated, Evercore ISI explained. “The tech giant is well positioned to continue to grow its presence in the U.S.,” analyst John Pancari said in a recent client note.
He used the latest ALCO (asset-liability committee) disclosures in his model to assess which banks are best positioned for rate cuts. “However, ALCO scenarios only tell part of the picture as they are typically based on near-static balance sheets and do not incorporate potential balance sheet restructurings or changes to hedging portfolios (although this approach is evolving),” he wrote.
Pancari therefore devised a more dynamic approach, adding management commentary on interest rate sensitivity, FY24 NII guidance and each bank’s assumptions for lowering the fed funds rate to paint a more complete picture.
His conclusion: “Through balance sheet restructuring, securities restructuring, and hedging efforts, banks will become increasingly less asset sensitive as the Fed’s policy shift approaches.”
“In sum, hedging efforts are also gaining momentum, and combined with an increase in announced and completed securities restructurings, banks’ actual sensitivities are likely to support an even less asset-sensitive and more liability-sensitive position going forward than the ALCO scenario would suggest in isolation,” he concludes.
In the end, ComericaNYSE:CMA), Truist Financial (NYSE:TFC), US Bancorp (USB), Fifth Third Bancorp (Nasdaq:FITB) appears to be in the most favorable position from the NII’s perspective, Pancari said.
Dovish comments from Fed Chairman Jerome Powell and weaker-than-expected July jobs data prompted the market to price in a 100-basis-point rate cut. That, combined with growing fears of a more pronounced recession, “prompted a rotation into liability-sensitive bank stocks and those seen as defensive against the credit cycle,” Pancari wrote. A string of more encouraging economic data over the past week has reversed that trend somewhat, and the market is now pricing in a 75-basis-point rate cut in 2024.
Analysts said the bank stocks that outperformed the sector the most were the least asset-sensitive and most liability-sensitive stocks, such as Comerica (CMA), Truist Financial (TFC), Fifth Third (FITB), and U.S. Bancorp (USB), as well as defensively positioned American Express (AXP) and JPMorgan Chase (JPM).
But if economic conditions worsen more than expected, credit worries could outweigh NII concerns and “have a much bigger impact on stock prices,” Pancari said.
