Banking Sector Implications of the Fed's Recent Rate Cut

Impact on banks' interest margins and lending activity

The Fed's recent rate cut is expected to compress banks' interest margins, as evidenced by quotes from major banks indicating lower deposit spreads and net interest revenue declines. Despite these challenges, some banks have managed to achieve revenue growth, highlighting resilience amid macroeconomic uncertainties.

"Banking revenue increased 3% from a year ago, driven by higher investment banking revenue due to increased activity across all products, partially offset by lower treasury management results driven by the impact of higher interest rates on deposit accounts." --- (WFC, earning call, 2024/Q2)

"The uncertainty around interest rates and the economic uncertainties that were expected to impact credit costs for banks caused banks to underperform the broader S and P 500 index for the last couple of years. More recently, we've seen a lift in our share price in" --- (BAC, event transcript, 2024/04/24)

"The increase in Private banking and lending net revenues reflected the impact of the sale of the Marcus loans portfolio in 2023 (including the significant mark-down of the portfolio in the first quarter of 2023), partially offset by the impact of lower deposit spreads." --- (GS, sec filing, 2024/Q1)

"Banking and wealth, however, were negatively impacted by macro uncertainty, which led to an NIR decline that you see at the bottom of the slide. But one of the key takeaways on this slide is that despite the challenging macroeconomic environment, we were still able to deliver revenue growth." --- (C, event transcript, 2024/06/18)

"Revenue of $5.3 billion was up 6% year-on-year, driven by growth in management fees on higher average market levels and strong net inflows, as well as higher brokerage activity, largely offset by deposit margin compression. Expenses of $3.5 billion were up 12% year-on-year, largely driven by higher compensation, primarily revenue-related compensation, and continued growth in our private banking advisor teams." --- (JPM, earning call, 2024/Q2)

Effects on deposit behavior and bank strategies

The Fed's recent rate cut is expected to stabilize deposit behavior, with banks focusing on managing deposit rates and loan demand. While some fluctuations in interest rate risk may occur, overall stability in deposits is anticipated, reducing the urgency for aggressive cash acquisition strategies.

"It's going to be more about that the impact of deposit rate paid as well as mix, that impact decreasing over time and ultimately stabilizing as well as then on the offset that continual repricing that we're going to get on the fixed rate asset side of things." --- (USB, conference, 2024/05/30)

"The current interest rate risk position could fluctuate to higher or lower levels of risk depending on the competitive environment and client behavior that may affect the actual volume, mix, maturity, and repricing characteristics of loan and deposit flows." --- (KEY, sec filing, 2024/Q2)

"So, even with a little bit of weakness from an overall industry deposit perspective at this point unless something really breaks in the liquidity system, we're not expecting the significant food fight for cash that happened last year as people were just scrambling to show that they had a stable balance sheet." --- (FITB, earning call, 2024/Q1)

"I will say this, I think just given where we are in terms of how high we are and how long we've been here and some of the client behavior that we're able to observe, I think the more impactful catalyst will be, again, getting some of that loan demand and balanced growth and client deposit growth as well. So would take it all." --- (TFC, earning call, 2024/Q2)

"beneficial than slower loan growth and or bleed in deposit cost. The only real risk to that mechanical reprice would be if rates really came down on those." --- (PNC, conference, 2024/05/29)

Regulatory implications of the rate cut

The Fed's recent rate cut is expected to create a more accommodative financing environment, influencing M&A activity while also prompting banks to manage their capital in line with regulatory requirements. Banks anticipate stabilization of balances and adjustments in their capital strategies as they navigate these regulatory implications.

"And the other thing I want to point out, because all of these questions about interest rates and yield curves and NII and credit losses, it's one thing to project it today based on what -- not what we think in economic scenarios, but the generally accepted economic scenario, which is the generally accepted rate cuts of the Fed." --- (JPM, earning call, 2024/Q1)

"So, if you put it all together, I think we expect the rate environment and the financing markets to continue to be accommodative and as well as to a continued deal-making with M&A being a bit larger in the overall mix, although some of the regulatory elements have put a damper on part of that." --- (C, earning call, 2024/Q2)

"We're also above our expected new CET1 regulatory minimum plus buffers of 9.8% starting in the fourth quarter of this year as our stressed capital buffer is expected to increase from 2.9% to 3.8%.We" --- (WFC, earning call, 2024/Q2)

"And that is predicated on the points that you mentioned, which is that as you see rate cuts, we would expect those balances to stabilize." --- (MS, earning call, 2024/Q2)

"And then secondly, a higher nominal rate environment allow you to manage to that outcome because part of the other outcome for us is just as rate -- the rate structure is nominally very low is the zero floors kick-in and that creates a amount of sensitivity that over time will go away if rate structure is higher." --- (BAC, earning call, 2024/Q2)

Stock performance of banks post-rate cut

Post-rate cut, banks like Wells Fargo are focusing on returning capital to shareholders through increased dividends and stock repurchases, which can enhance stock performance. This strategy reflects confidence in their financial health and adaptability to changing interest rates, positively influencing investor sentiment.

"allows us to serve our customers' financial needs and we remain committed to prudently return excess capital to our shareholders.As we previously announced, we expect to increase our third quarter common stock dividend by 14% to $0.40 per share, subject to the approval by the Company's Board of Directors at its regularly scheduled meeting later this month.We repurchased over $12 billion of common stock during the first half of this year, and while the pace will slow, we have the capacity to continue repurchasing stock." --- (WFC, earning call, 2024/Q2)

"or 3%, driven by the impact of balance sheet mix and higher rates, higher revolving balances in card, and the additional month of First Republic related NII, partially offset by deposit margin compression and lower deposit balances.NIR ex-Markets was up $7.3 billion or 56%." --- (JPM, earning call, 2024/Q2)

"Our strong performance in both DCM and ECM drove investment banking revenue growth of 35% and overall banking revenue growth of 49%." --- (C, earning call, 2024/Q1)

"And so, if you think about the parts that priced up in Global Banking or the investment-related cash in the Consumer business and Wealth Management, that will come back down as rates come, because the short-term equivalents come down, some is absolutely mechanical because it's actually priced to meet a money market fund equivalent that will happen.And so, yes, I think if you think about us being all in, if you look on that slide at 203 basis points, there'll be some pickup as rates come down in those higher things." --- (BAC, earning call, 2024/Q2)

"In the Q1, we repurchased a little over $6,100,000,000 in common stock. And in 2023, we also increased the common stock dividend from $0.30 to 0 point 3 $5 dollars I would say it's a topic of conversation that the Board has on a regular basis. We think about the total levels of capital that we want to run the company with and therefore what's appropriate in terms of dividend and share repurchases and we consider a number of factors including the current market conditions, interest rate movements, risk weighted asset levels, the economic environment and certainly the stress test results." --- (WFC, annual general meeting, 2024/04/30)

Economic outlook and its impact on banking

The economic outlook remains uncertain due to inflation, elevated rates, and geopolitical factors, which could adversely affect credit quality metrics in the banking sector. However, improvements in the macroeconomic outlook and deposit growth indicate potential resilience and growth opportunities for banks despite these challenges.

"Uncertainty remains regarding Bank of America 28 broader economic impacts as a result of inflationary pressures, elevated rates and the current geopolitical environment and could lead to adverse impacts to credit quality metrics in future periods. Consumer Portfolio Credit Risk Management" --- (BAC, sec filing, 2024/Q2)

"This was partially offset by improvements in the macroeconomic outlook. In the prior year period, the Provision for credit losses on loans and lending commitments of $109 million was primarily related to credit deterioration in commercial real estate lending, mainly in the office sector, and deterioration in the macroeconomic outlook." --- (MS, sec filing, 2024/Q2)

"And then moving to Investment Banking, where notwithstanding the fact that we are already the market leader, the business still has enormous potential for growth. And then financial sponsors, whose scale and role in the market is expanding each year." --- (JPM, event transcript, 2024/05/20)

"Matt O’Connor: Hi, good morning. I want to follow up on the comment that costs this year could come in higher on higher revenues, investment advisory, and I would assume the same if banking and trading continue to be so strong." --- (WFC, earning call, 2024/Q1)

"So you're seeing the plateauing of the increase in rates now happen. And the only impact when you go across the businesses in rate structure quarter to quarter is really where people are adding deposits in the banking business, which is $550,000,000,000 or more." --- (BAC, conference, 2024/09/10)

Strategic adjustments by banks in response to the rate cut

In response to the Fed's recent rate cut, banks are prioritizing cost control and strategic investments in technology, particularly AI, to enhance efficiency. This shift reflects a broader trend among financial leaders to adapt to economic uncertainties while seeking growth opportunities, such as increased investment banking fees and improved client services.

"Survey of more than 2,000 U.S. corporate finance leaders reveals the top two priorities are cost control within finance function and across the business. Among top risks, geopolitical tensions rise while inflation drops significantly. Just 37% of finance leaders have a positive outlook for the U.S. economy for the rest of 2024, but nearly 60% are optimistic about the next three years. U.S. corporate finance leaders have increased focus on cutting costs to prepare their firms for potential economic and geopolitical uncertainty, according to the fourth annual U.S. Bank CFO Insights Report." --- (USB, press release, 2024/04/25)

"We're already seeing some Central Banks in the emerging markets starting to cut rates." --- (C, earning call, 2024/Q1)

"While we view our work here as a long-term commitment, we expect to see results in the short and medium term and are encouraged by the improved performance we've already seen with strong growth in investment banking fees during the first half of the year. In our Wealth and Investment Management business, we have substantially improved advisor retention and have increased the focus on serving independent advisers and our consumer banking clients, which should ultimately help drive growth." --- (WFC, earning call, 2024/Q2)

"We have innovated and significantly streamlined service requests by enabling clients to directly initiate and track transaction inquiries within our awarded CashPro platform, using AI to accomplish that. Third, we continue to make core strategic investments in our businesses." --- (BAC, earning call, 2024/Q2)

"Artificial Intelligence (AI) and areas for efficiencies Finance leaders are prioritizing investments in technology (47%) over layoffs (21%) as the primary solution for cutting costs in the next 12 months." --- (USB, press release, 2024/04/25)

Consumer borrowing trends following the rate cut

Consumer borrowing trends post-Fed rate cut show mixed signals. While average consumer loans increased year-over-year, a decline in the savings rate and rising loan defaults raise concerns. Despite this, strong customer activity and expectations of stable loan growth suggest resilience in borrowing behavior.

"(j) Average consumer loans held-for-sale and loans at fair value were $15.1 billion and $11.0 billion for the three months ended March 31, 2024 and 2023, respectively." --- (JPM, sec filing, 2024/Q1)

"For the quarter, consumer earned $2.6 billion on continued strong organic growth, and reported earnings declined 9% year-over-year as revenue declined from lower deposit balances, compared to the second quarter of last year.Customer activity showed another strong quarter, net new checking growth, another strong period of card openings, and investment balances for consumer clients, which climbed 23% year-over-year to a new record $476 billion." --- (BAC, earning call, 2024/Q2)

"John Campbell: Our next question is about the economy. I am reading information that the consumer savings rate is starting to decrease and defaults on loans are increasing." --- (WFC, event transcript, 2024/04/30)

"We expect the Fed to cut rates 2 times in 2024, with a 25 basis point decrease in September and another in December. Looking at the third quarter of 2024 compared to the second quarter of 2024, we expect average loans to be stable, net interest income to be up 1% to 2%, fee income to be up 1% to 2%, other non-interest income to be in the range of $150 million and $200 million, excluding Visa and securities activity." --- (PNC, earning call, 2024/Q2)

"They're a little bit more sensitive on rates. So the borrowing is still good and it'll still be up year over year, but you'll see slightly less muted versus our lower end." --- (BAC, conference, 2024/06/11)

Competitive landscape changes in the banking sector

The recent Fed rate cut has intensified competition in the banking sector, with traditional banks and non-bank entities vying for market share. Firms are focusing on efficiency, expanding regional capabilities, and adjusting strategies to navigate the evolving landscape, highlighting a shift towards more aggressive growth and competitive positioning.

"The competitive landscape for our businesses continues to intensify from traditional peers in areas like middle market and investment banking as well as non banks in areas like private credit." --- (JPM, event transcript, 2024/05/20)

"So our aspiration is to take inefficiency out of the banking system and therefore provide conventional rails that look sound and act on a 20 fourseven basis and effectively allow us to compete on an equal footing while being in a regulated overseen environment, which we think is a competitive advantage for us. So that's how I would position it." --- (C, event transcript, 2024/06/18)

"We now have more than 200 regional bankers across the country to better serve our commercial clients, and they complement our industry coverage to our corporate clients. In our global markets business, we continue to extend balance sheet to our clients in adding expertise and talent to continue to lead our market share improvements seen over the last several years." --- (BAC, earning call, 2024/02/04)

"But as long as our assumptions on spend, balanced growth, and credit continue to play out as expected, we expect the card business to meaningfully contribute to profit growth in the future as the portfolio matures. We have been methodically growing our corporate investment bank, which has been a priority and continues to be a significant opportunity for us." --- (WFC, earning call, 2024/02/03)

"Deposit repricing is captured by evaluating the change in deposit rate paid relative to the change in market rates (deposit beta) and we calibrate the deposit betas used in our models by using a number of factors, including observed historical behavior, future expectations, funding needs and the competitive landscape." --- (GS, sec filing, 2024/Q1)