By By Niket Nishant and Manya Saini
(Reuters) -U.S. bank stocks rose on Thursday after the Federal Reserve’s 50 basis point cut in interest rates raised hopes of lower deposit costs and reduced pressure on borrowers.
Banks have set aside billions as a cushion against potential defaults among borrowers, particularly in their commercial real estate (CRE) portfolios where a lack of demand for office spaces has led to immense pressure.
“For banks, particularly those that hold mortgages and auto loans, there may be a benefit to spreads in the near term,” said Charlie Wise, senior vice president and head of global research and consulting at TransUnion (NYSE:TRU).
Wells Fargo climbed 3% while JPMorgan Chase (NYSE:JPM), the largest U.S. bank by assets and the sector’s bellwether, was trading 1% higher.
Citigroup and Bank of America climbed 2.6% and 2.3%, respectively.
Wall Street powerhouse Goldman Sachs gained 3%, while rival Morgan Stanley was up 1.3%.
REFINANCING WINDOW
Top banks echoed the Fed’s move and reduced their prime lending rates on Wednesday, but most auto loans and mortgages carry a fixed rate of interest, which means they will continue to fetch higher yields from such debt even after the cut.
Still, borrowers looking for immediate relief could refinance their loans and negotiate better repayment terms, lowering the risk of defaults.
“The Fed cut reduces uncertainty over the borrowing costs and the economy,” said J.P. Morgan analyst Steven Alexopoulos.
“We expect a lower funds rate to ignite commercial borrower demand for loans.”
Regional banks are expected to benefit more from rate cuts, compared with their larger rivals, since they have a bigger exposure to the CRE sector.
Shares of Valley National, Banc of California (NYSE:BANC), KeyCorp (NYSE:KEY) and Western Alliance (NYSE:WAL) rose nearly 3.8% each.
“The initial positive reaction by the bank stock indices makes sense, as a 50 bp cut takes the edge off the high-end credit concerns,” analysts at Jefferies said.
Allen Tischler, senior vice president of Financial Institutions Group at Moody’s (NYSE:MCO) Ratings, also said the cuts “will be credit positive for asset quality because lower rates make debt payments more affordable for borrowers with floating-rate loans.”
Still, lenders are maneuvering a delicate economic environment. While investors expect the Fed to continue easing in the coming months, some have questioned if the central bank is behind the curve.
Sentiment toward the banking sector had also taken a hit after three major players collapsed in early 2023, in part due to higher rates that pushed up unrealized losses in their investment portfolios.
The KBW Regional Banking Index is up 4.4% this year through previous close, compared with an 18% gain in the benchmark S&P 500.
The S&P 500 Banks Index, which tracks large-cap banks, has gained 17.5% in the same period.
“(The rate cut) leaves open the question about the underlying economy and if the pace of slowing is in fact worsening in the Fed’s mind,” Jefferies said.
