Jamie SpencerAs the third-quarter earnings season kicks off, all eyes are on the largest U.S. banks, including JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup. Investors are eager for insights into how the Federal Reserve’s recent rate-cutting cycle will shape these institutions’ financial performance. With declines in net profits expected, the key question is how falling interest rates will impact lending margins, net interest income (NII), and overall profitability.
The Impact of Rate Cuts on Big Banks
The Federal Reserve initiated a new phase of rate cuts with a half-percentage-point reduction on September 18, potentially signaling an easing cycle that could continue into next year. Lower borrowing costs typically benefit consumers and businesses but create a mixed outlook for large banks. As loan rates fall, a critical source of interest income that drove profitability in recent years is under pressure.
However, there could be a silver lining in the form of reduced deposit costs, which may eventually help to stabilize margins. Yet, uncertainty lingers around how quickly these adjustments will occur, leaving investors to speculate on the full-year trends that will shape the banking sector’s outlook.
JPMorgan’s Earnings in Focus: Risks and Rewards
As the largest U.S. bank, JPMorgan Chase is under close scrutiny. Investors are particularly interested in how the recent rate cuts will impact its NII—a metric that has been a significant driver of the bank’s earnings. During the Fed’s rate hikes, JPMorgan enjoyed record profits, with its stock climbing over 24% this year. However, the shift to lower rates introduces new challenges.
JPMorgan’s COO Daniel Pinto recently warned that consensus estimates for NII in 2025 were “not very reasonable,” highlighting the difficulties posed by declining rates. His remarks led to the bank’s largest one-day stock drop since 2020. In response, analysts have begun to adjust their outlooks. Morgan Stanley downgraded the stock, suggesting that JPMorgan might benefit the least from rate cuts, given its strong performance during the tightening cycle. As floating-rate loans reprice lower and deposit costs take longer to adjust, the pressure on JPMorgan’s margins could persist.
Challenges Across the Banking Sector
JPMorgan’s challenges are mirrored by those of other leading banks, such as Wells Fargo, Bank of America, and Citigroup, all of which are set to release their earnings soon. Analysts predict a drop in net profits for these banks, partly due to elevated rates throughout most of the third quarter, which have squeezed lending margins.
David Fanger, senior vice president at Moody’s Ratings, pointed out that while deposit costs tend to adjust more slowly than floating-rate assets, they will eventually catch up. This lag may limit the immediate advantages for major banks, particularly those that were slower to raise deposit rates during the Fed’s tightening period.
Regional Banks Poised for Gains as Rates Fall
While large banks navigate the complexities of a rate-cutting environment, regional banks may find themselves in a more favorable position. Many regional institutions saw a sharp rise in funding costs after the collapse of Silicon Valley Bank and other regional lenders in 2023. Now, as rates decline, regional banks stand to benefit from “mean reversion” in deposit costs, potentially boosting their margins.
Morgan Stanley’s research suggests that mid-cap banks like KeyCorp and PNC could emerge as the primary beneficiaries of the current rate environment. According to KBW’s analysis, earnings growth among regional lenders might soon catch up to the performance of their larger peers, offering a potential bright spot in the banking landscape.
Will Lower Rates Bring Opportunities for Banks?
Despite concerns over falling NII, some investors see opportunities for banks, especially if the U.S. economy avoids slipping into a recession. Lower rates can encourage increased deal-making and spur demand for loans from both consumers and businesses, which could be a boon for banks with strong investment banking operations.
Stephen Biggar, director of research at Argus Research, commented that the Fed’s easing could prove to be “beneficial for banks and beneficial for the market,” noting that the recent period of high rates had “worn out their welcome.” If banks can adapt to the changing rate environment while maintaining a steady economic backdrop, they may find new avenues for growth that offset some of the pressures on margins.
Net Interest Income: A Crucial Metric for Investors
As earnings reports roll in, NII remains a key indicator of how banks manage the shifting rate landscape. NII measures the difference between the interest banks earn on their assets and what they pay for deposits. For JPMorgan, which gained considerably from higher rates, the challenge is now to temper investor expectations while navigating a period of tightening margins.
Daniel Pinto’s comments have set the stage for a more tempered outlook, but market watchers will scrutinize the bank’s earnings to assess how well it can adjust to the new realities. Morgan Stanley’s recent downgrade suggests a broader sentiment that the advantages banks enjoyed during the Fed’s rate hikes may be more difficult to replicate in this environment.
Early Signs of Adjustments in Deposit Rates
There are indications that banks are beginning to lower deposit rates in response to the Fed’s recent rate reductions. Curinos, a deposit advisory firm, found that 78% of the 500 U.S. banks it tracks have lowered rates on certificates of deposit (CDs) that previously exceeded 4%. Additionally, 50% have reduced savings and money market accounts rates above 4%.
These early adjustments suggest that banks are fine-tuning their pricing strategies, but it remains uncertain how quickly this will translate into improved margins. Adjusting deposit costs will be critical as banks strive to mitigate the effects of reduced interest income.
The start of the Fed’s rate-cutting cycle presents a mix of challenges and opportunities for the U.S. banking sector. As the third-quarter earnings season unfolds, investors will be focused on how leading banks like JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup adapt to lower rates. While large banks may face pressures on their margins, regional institutions could find relief in reduced deposit costs. The shifting interest rate environment will play a decisive role in shaping the financial sector’s trajectory, with net interest income, lending margins, and deposit rates all key to the outcome.
