Analysts forecast a bright future for banks as rate cuts pave the way for profit recovery.
- Federal Reserve cuts federal-funds rate by 0.5% on Sept. 18, 2023.
- Analysts predict a reversal of profit declines for banks, with an 8% increase in earnings-per-share in 2025.
- Charles Schwab Corp. expected to show the most improvement in net interest margins in 2025.
- Investors are moving towards longer-term bonds, benefiting banks by reducing unrealized losses.
- Third-quarter earnings reporting season for banks begins on Oct. 11, 2023.
On September 18, 2023, the Federal Open Market Committee made headlines by cutting the target range for the federal-funds rate by half a percentage point. However, it will take time for banks to reflect these changes in their financial results. Looking ahead to 2025, analysts have identified which banks are likely to see the most significant improvements in their net interest margins (NIM). As short-term interest rates decline, demand for longer-term bonds has surged, with the yield on 10-year U.S. Treasury notes remaining lower than that of three-month Treasury bills. This trend suggests further cuts in short-term rates by the Federal Reserve. The shift towards longer-term bonds is beneficial for banks, as it reduces unrealized losses in their securities portfolios, thereby enhancing earnings and easing capital ratio pressures. This improvement allows banks to increase dividend payouts and repurchase stock, which can further boost earnings per share. The third-quarter earnings reporting season for banks kicks off on October 11, 2023, with JPMorgan Chase & Co. and Wells Fargo & Co. among the first to report. Investors should keep an eye on the future, as analysts from Keefe, Bruyette & Woods predict a turnaround for the banking industry, projecting an 8% increase in earnings-per-share in 2025, followed by a 12% increase in 2026. Currently, the federal-funds rate stands at 4.75% to 5%, with projections indicating a drop to 3.4% in 2025 and 2.9% in 2026. The banks expected to show the best improvement in their NIM include Charles Schwab Corp., Ally Financial Inc., and UMB Financial Corp., among others. Schwab is projected to lead with a 0.54% improvement in NIM and an 18.6% increase in net interest income for 2025. Analysts also expect a 28% increase in earnings per share for Schwab. Other banks like KeyCorp and Banc of California are also expected to see significant increases in their earnings. Overall, the outlook for the banking sector appears optimistic as it prepares for a recovery in profits following a challenging period.·
Factuality Level: 7
Factuality Justification: The article provides a detailed analysis of the Federal Open Market Committee’s recent actions and their implications for banks’ net interest margins. While it contains relevant data and projections, some sections are overly technical and may confuse readers not familiar with financial terminology. There is a slight bias in the optimistic tone regarding future bank earnings, but overall, the information is well-researched and factual.·
Noise Level: 8
Noise Justification: The article provides a detailed analysis of the impact of recent Federal Reserve actions on banks’ net interest margins and earnings projections. It includes specific data, forecasts, and insights from analysts, which supports its claims with evidence. The focus remains on the banking sector and its financial metrics, avoiding irrelevant information. However, while it does hold banks accountable to some extent, it could further explore the broader implications of these financial trends on consumers and the economy.·
Public Companies: Charles Schwab Corp. (SCHW), Ally Financial Inc. (ALLY), UMB Financial Corp. (UMBF), KeyCorp (KEY), Banc of California Inc. (BANC), Prosperity Bancshares Inc. (PB), Pinnacle Financial Partners Inc. (PNFP), United Bankshares Inc. (UBSI), BankUnited Inc. (BKU), Comerica Inc. (CMA), PNC Financial Services Group Inc. (PNC), Valley National Bancorp (VLY), American Express Co. (AXP), Cadence Bank (CADE), Citizens Financial Group Inc. (CFG)
Key People: Christopher McGratty (Analyst at Keefe, Bruyette & Woods)
Financial Relevance: Yes
Financial Markets Impacted: Yes
Financial Rating Justification: The article discusses the Federal Open Market Committee’s decision to cut the federal-funds rate, which directly pertains to financial topics such as interest rates, net interest margins, and bank earnings. It highlights how these changes will impact various banks’ financial performance and stock prices, particularly mentioning companies like JPMorgan Chase, Wells Fargo, and Charles Schwab. The expected improvements in net interest margins and earnings per share for these banks indicate a significant impact on financial markets.·
Presence Of Extreme Event: No
Nature Of Extreme Event: No
Impact Rating Of The Extreme Event: No
Extreme Rating Justification: The article discusses financial market trends and predictions regarding banks’ earnings and interest margins, but it does not report on any extreme event that occurred in the last 48 hours.·
Move Size: No market move size mentioned.
Sector: All
Direction: Up
Magnitude: Large
Affected Instruments: Stocks
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