Federal Reserve is said to have caused one of the most significant shifts in monetary policy when it reduced the benchmark interest rate by half a percentage point. With the help of the interest cut, it aims at stimulating economic growth much better. According to its strategy, it is believed that an extra cut of two percentage points would be made in the near future. As of the whole, this decision is generally good news for banks. Even lower interest rates will alleviate the burden under which customers have been shifting their deposits from traditional checking accounts to higher-yielding alternatives, such as certificates of deposit and money market funds.
Yet all that seems so positive currently is not without problems. Inflation fears that will not die altogether could limit additional rate cuts to less total depth; therefore, one has revisited NII-net interest income-the difference between what banks collect on loans and securities and what they pay to depositors. As Chris Marinac, research director at Janney Montgomery Scott says, “I speak to our clients and say that is one thing that troubles me too and causes them to wonder swhat the Fed’s going to do next.”.
Analysts will be keen to hear words on NII this Friday ahead of an earnings report by JPMorgan Chase as the bank is expected to show a year-over-year decline of 7.4% in earnings to $4.01 a share. While one round of easing by the Fed is going to provide positive windfall to banking sector as a whole, the positive impacts will arrive at institutions at different times and levels, due to differences in both assets and liabilities sensitivities to changes in interest rates.
Analysts at Goldman Sachs predicted a 4% decline in NII for the large banks in the third quarter due to weak growth of loans and slow deposit repricing. However, NII estimates for the current year may be proved to be too optimistic by the sector, as recently voiced by JPMorgan’s president, focusing on the threat.
Regional banks have been under more pressure from higher funding costs and may benefit the most from lower rates. Morgan Stanley analysts now change ratings in favor of U.S. Bank and Zions, while downgrading Bank of America and Wells Fargo, which tempered NII expectations and potential loan losses in 2025 as a very serious negative. Analyst Charles Peabody said these dynamics are still unclear and acknowledged it was a very difficult process in trying to model ahead NII growth.