U.S. bank stocks saw a significant boost Thursday following the Federal Reserve’s substantial rate cut, with investors optimistic about the potential benefits for both large Wall Street firms and regional banks. Notable gains included Capital One (COF) and Citigroup (C), both rising by 5%, while other major banks like Goldman Sachs (GS), Bank of America (BAC), and Wells Fargo (WFC) also experienced increases.
The KBW Nasdaq Bank Index and indexes tracking large and midsize regional banks each rose over 2%, reflecting a bullish sentiment reminiscent of the 1995 rate-cutting cycle that led to strong bank performance. However, experts caution that the effects of lower rates might be more complex than they appear.
Moody’s Ratings highlighted potential initial challenges, noting that lower rates could negatively impact net interest income—critical revenue for banks—due to slower adjustments in deposit costs compared to loan yields. Despite these short-term concerns, Moody’s anticipates long-term benefits as reduced deposit costs eventually strengthen net interest income and support asset quality.
RBC Capital Markets analysts expect large banks to increase provisions for potential loan losses in the coming year while still achieving improved earnings by 2025. Regional banks, particularly those with significant commercial real estate exposure, may benefit most quickly as lower rates revive demand from commercial borrowers.
Overall, while the current environment presents uncertainties, analysts believe the banking sector is positioned for a revaluation, driven by an improving economic outlook and changes in borrowing dynamics.
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