Jefferies says banking industry's interest income in jeopardy, but deposits could be cheaper
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JEFFERIES SAYS BANKING INDUSTRY'S INTEREST INCOME IN JEOPARDY, BUT DEPOSITS COULD BE CHEAPER
The U.S. Federal Reserve's bumper 50 basis points interest rate cut has the potential to put banks' near-term net interest income forecasts at risk but it can help lower deposit costs and ignite loan growth, analysts at Jefferies led by Ken Usdin said.
"Net interest income forecasts could drift lower, but banks could get more aggressive on the deposit side," the brokerage wrote in a note.
"Lower rates could also help loan/deposit growth, capital markets activity, mortgage, and book value growth."
Interest income, earned off charging customers on loans, had surged as the U.S. Federal Reserve rapidly tightened monetary policy, sustaining bank profits through a broad slowdown in investment banking.
Lower rates are expected to hurt lending margins, which have been in investor focus since JPMorgan Chase JPM.N, the sector's bellwether, flagged that market expectations were too high and difficult to achieve.
Still, bank stocks are trading higher after the cut as investors cheer easing pressure on borrowers.
"The initial positive reaction by the bank stock indices makes sense, as a 50 bps cut takes the edge off the high-end credit concerns but leave open the question about the underlying economy today and if the pace of slowing is in fact worsening in the Fed's mind," Jefferies said.
Elevated interest rates have weighed on loan growth and consumer spending this year, while also increasing fears of borrowers defaulting on their loans.
(Manya Saini)
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