Analyst notes
The Federal Reserve's recent move to cut interest rates by 50 basis points serves as "a key turning point" for regional banks, which faced several major headwinds as rates rose from March 2022 to July 2023, J.P. Morgan analysts said.
The headwinds include pressured net interest margins (NIMs) as deposit costs rose; "anemic industry loan growth" as borrowing costs increased and business confidence dampened; and elevated concerns over credit quality trends, with a focus on commercial real estate (CRE). These headwinds will now change direction and eventually become tailwinds, the analysts said.
"In addition with short-term rates falling, the yield curve has also de-inverted, which not only represents a path towards improved NIMs and earnings, but in our view also signals a widening runway for a soft landing — a key catalyst for generalist investors to start returning to the sector again," the analysts wrote in a note.
Live Oak Bancshares Inc. and Western Alliance Bancorp. are two of the highest payers on deposit costs "poised to see a material reset lower in funding costs," the analysts said.
As lower rates spark demand for commercial loans, Live Oak, Western Alliance, Metropolitan Bank Holding Corp., Cullen/Frost Bankers Inc. and Pinnacle Financial Partners Inc. will continue to lead in overall loan growth. Banks with big commercial and industrial (C&I) lending operations, such as Huntington Bancshares Inc. and M&T Bank Corp., will benefit more than peers from a possible resurgence of demand for C&I loans, according to the analysts.
Moreover, the analysts said fears over banks with CRE overhangs — including M&T, Metropolitan, Webster Financial Corp., New York Community Bancorp Inc., Valley National Bancorp and Amalgamated Financial Corp. — and banks with a perceived higher credit risk profile like Western Alliance will diminish thanks to lower rates. First Citizens BancShares Inc. will benefit from rate cuts in the form of Silicon Valley Bank deposits and loans, the analysts added.
"With the Fed cutting interest rates being the single most important catalyst that we'd been waiting for to reverse a list of headwinds into tailwinds, as this is finally in sight we view that the sector is poised for re-valuation from the current valuation of 1.3x [price-to-tangible book value, adjusted for accumulated other comprehensive income], which compares to the historical 1.8-2.0x valuation," the analysts wrote.
Janney Montgomery Scott analysts believe the rate cut will allow most US banks to consider lowering their deposit rates.
"The positive benefit should be a function of how quickly financial institutions can lower average funding costs for deposit accounts and borrowings alike," the Janney analysts wrote in a note. "Since demand deposits are already zero-cost and [certificates of deposits] have fixed maturity dates (and fixed rate terms), the residual 'non-maturity Deposits' have immediate re-pricing potential."
________________
Mizuho Securities analyst Dan Dolev believes there are two ways buy-now, pay-later company Affirm Holdings Inc. could benefit from rate cuts: boosting revenue less transaction costs and opening the credit box.
"We believe that lower rates could drive 30-35% potential upside to consensus [fiscal 2027 gross merchandise volume] helped by [Affirm] greatly widening the credit box," Dolev wrote in a note. "This — coupled with significant operating leverage in the business — could result in a blue sky GAAP EPS scenario that's 2-3x above consensus."
At 2:14 p.m. ET Sept. 19, Affirm shares were up over 2% from the prior day, when the Fed cut rates by 50 basis points.
