U.S. bank stocks rose in premarket trading on Thursday, a day after the Federal Reserve cut interest rates by 50 basis points, a move expected to lower deposit costs and ease pressure on borrowers.
Rising interest rates have weighed on credit growth and consumer spending this year, and fears that borrowers will default on their loans have increased.
Commercial real estate loan portfolios are under enormous pressure from high interest rates and lack of demand for office space, leading banks to set aside billions as a buffer against defaults.
“For banks, particularly those that provide mortgages and auto loans, spreads can provide short-term benefits,” said Charlie Wise, senior vice president and head of global research and advisory at TransUnion.
Citigroup (C) led the rise in big bank shares, rising 1.8% before the bell, followed closely by Bank of America (BAC) and Wells Fargo (WFC), which rose 1.6% and 1.55%, respectively.
JPMorgan (JPM), the largest U.S. bank by assets and the industry bellwether, last rose 1.3%. Investment banks Goldman Sachs and Morgan Stanley also rose in thin premarket trading.
Most auto loans and mortgages have fixed interest rates, meaning banks will continue to receive higher returns even after the rate cut.
Borrowers seeking immediate debt relief can also refinance their loans and negotiate better repayment terms, thereby reducing the risk of default.
Regional banks are expected to benefit more from rate cuts than their larger peers as higher deposit costs normalize and loan demand recovers.
New York Community Bancorp led gains among regional banks, rising 3.6% before the bell. Banc of California, Fifth Third, Western Alliance and Comerica rose between 2% and 2.5%.
The S&P 500 Banks Index, which tracks large banks, has risen 17.5% this year, compared with an 18% gain for the benchmark S&P 500. The KBW Regional Banking Index has risen 4.4% over the same period.
Investor sentiment towards the sector took a hit after three major players went bankrupt in early 2023, partly due to higher interest rates leading to unrealised losses on their loan portfolios.
“(The downgrades) will be positive for banks’ asset quality as lower interest rates make debt payments more affordable for borrowers with variable-rate loans,” said Allen Tischler, senior vice president of the Financial Institutions Group at Moody’s Ratings.
Still, lenders are navigating a delicate economic environment. While investors expect the Fed to continue easing in the coming months, some have questioned whether the central bank is lagging behind.
(Reporting by Manya Saini and Niket Nishant in Bengaluru; Editing by Shailesh Kuber)
