The Zacks Major Regional Banks will benefit from the Federal Reserve’s interest rate cuts as the deposit/funding costs come down and the industry-wide lending backdrop improves. Further, a decent economic expansion will support the industry players’ net interest income (NII) and margins.
Business restructuring/expansion initiatives and digitization will offer support. Though weakening asset quality is likely to exert pressure on the financials to some extent, major banks like U.S. Bancorp USB, Truist Financial Corporation TFC, The Bank of New York Mellon Corporation BK and Northern Trust Corporation NTRS are worth keeping an eye on.
The Zacks Major Regional Banks industry includes the nation’s largest banks in terms of assets, with most operating globally. The financial performance of these banks largely depends on the nation’s economic health. As the banks are involved in several complex financial activities, they are required to meet the stringent regulations set by the Federal Reserve and other agencies. Apart from traditional banking services, which are the source of the net interest income (NII), major regional banks provide a wide array of other financial services and products to retail, corporate and institutional clients, both domestic and global. These include credit and debit cards, mortgage banking, wealth management and investment banking, among others. Therefore, a large revenue source for these banks is fees and commissions earned from these services.
Lower Interest Rates: Last year, the Fed lowered the interest rates by 100 basis points. The Fed fund rates are now in the 4.25-4.5% range. The central bank officials signaled two more rate cuts this year and two in 2026. With this, the Fed fund rates will be 3.4% by the end of next year. Because of the central bank’s aggressive monetary tightening since early 2022 to control persistent inflation, major regional banks are reeling from higher deposit/funding costs. While banks reaped huge benefits in the form of higher net interest margin (NIM) and NII during the initial phase of high rates, challenges related to slowing loan demand, increased funding costs and reduced liquidity became more apparent gradually. Hence, as the interest rates come down, banks will likely benefit from the fall/stabilization of deposit costs and a gradual improvement in the lending scenario. There will likely be near-term pain in the form of lower NII and NIM, but the industry players are expected to gain from reduced interest rates eventually.
Modest Rise in Loan Demand: The central bank’s aggressive monetary policy hurt loan demand amid the risk of a severe economic downturn/recession. The Fed’s Summary of Economic Projections released in December 2024 indicates that the U.S. economy will continue to show resilience and grow 2.5% in 2024 (the same rate as 2023). Further, economic growth is expected to slow marginally to 2.1% this year. While the high rates kept the borrowers on the sidelines…
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