Proactive Investors - US banks’ third quarter earnings are expected to benefit from upcoming Federal Reserve rate cuts, Bank of America (NYSE:BAC) analysts believe.
Reduced rates could be a positive development for banks, particularly in a scenario where customer activity rebounds contributing to an economic soft landing, the analysts wrote in a note to clients.
They see the expected rate cuts as a favorable driver of price-to-earnings (P/E) ratios, with the prospect of improved loan growth, mortgage demand, and investment banking activity.
Bank of America recommended focusing on regional banks over larger money center institutions in the upcoming quarterly results.
Regional banks are better positioned to defend their net interest income (NII) and net interest margins (NIM), thanks to more flexible deposit strategies, effective hedging, and greater capital relief from reduced mark-to-market losses on bond portfolios, they wrote.
Overall, they project a decline in NIM and NII through the fourth quarter of 2024 and into early 2025, with stabilization expected by mid-2025.
Loan growth is predicted to remain flat in the near term but should begin to recover later in 2025.
Credit metrics are forecast to see a slight increase in net charge-offs next year, while capital markets activity for regional banks is expected to grow by 5% to 10% year-over-year, with mortgage activity forecasted to rise by 30%.
Among Bank of America’s top picks for the quarter are ‘Buy’-rated US Bancorp (NYSE:NYSE:USB), Western Alliance (NYSE:WAL), PNC Financial Services Group Inc (NYSE:NYSE:PNC), Fifth Third Bancorp (NASDAQ:FITB), M&T Bank Corp (NYSE:MTB), and Truist Financial Corp (NYSE:TFC).
On the other hand, Comerica Inc (NYSE:NYSE:CMA) has been downgraded to ‘Underperform,’ as its valuation appears full and the downside risks remain unaccounted for.
Morgan Stanley (NYSE:NYSE:MS) and Goldman Sachs Group Inc (NYSE:NYSE:GS, ETR:GOS) are identified as particularly well-positioned for positive EPS revisions in the coming quarters.
Bank of America pointed out the potential for a rebound in investment banking activity and an increase in asset flows into higher-margin products.
Morgan Stanley (NYSE:MS), after a period of stock underperformance, is seen as “particularly compelling” given its renewed focus on trading market share and increased exposure to the equities business, which could help it regain its premium valuation.
The analysts also noted the sentiment towards Bank of New York Mellon Corp (NYSE:NYSE:BK, ETR:BN9) is “unmatched.”
“Investor sentiment on the stock is the most positive across our 40 plus banks coverage based on our conversations as management execution getting attention,” they wrote.