Richard Drew
When the Fed raises interest rates, banks’ net interest income generally rises. So, when the central bank eases monetary policy, it makes sense that banks’ net interest income will fall.
But it’s more complicated than that, as Evercore ISI explains. Analyst John Pancari said in a recent note to clients:
He used updated ALCO disclosures in his model to help assess which banks would be best positioned for a rate cut. “However, ALCO scenarios are only part of the story because they are typically based on a mostly flat balance sheet and therefore do not include balance sheet reshuffling or potential changes to the hedge portfolio (although this approach is evolving),” he wrote.
Accordingly, Bancari created a more dynamic approach, adding management commentary on interest rate sensitivities, FY24 net interest income guidance, and each bank’s assumed federal funds rate cuts, to paint a more complete overview.
The bottom line is that banks “have become progressively less asset sensitive as the Fed’s transition approaches through balance sheet reshuffling, securities restructuring, and hedging efforts.”
“In short, hedging efforts have also gained momentum, and coupled with the acceleration in announced and completed securities restructurings, banks’ actual sensitivities are likely to support less asset-sensitive/more liability-sensitive positions going forward than what the ALCO scenarios suggest, in isolation.”
The result is Comerica (NYSE:CMA), Financial Header (New York:TFC), US Bancorp (USB), and Fifth Third Bancorporation (NASDAQ: FITBTheir situation seems to be the best from the NII’s point of view, Bankari said.
Fed Chair Jerome Powell’s dovish comments and a weaker-than-expected jobs report in July have led markets to price in a 100 basis point rate cut. This, coupled with growing fears of a more pronounced recession, “has led to a rotation in bank stocks toward liability-sensitive and credit-cycle-friendly banks,” Bancari wrote. There has been some easing of that trend as more encouraging economic data emerged last week, and the market is now pricing in a 75 basis point rate cut in 2024.
The analyst said that the bank stocks that outperformed the banking sector by the widest margin were those that were least asset sensitive/most liability sensitive, including Comerica (CMA), Truist Financial (TFC), Fifth Third (FITB), and U.S. Bancorp (USB), and were well positioned defensively like American Express (AXP) and JPMorgan Chase (JPM).
However, if the economic scenario deteriorates more than expected, credit concerns could outweigh concerns about net interest income, “and thus weigh more heavily on stock performance,” Pancari said.