Bank stocks join market rally. Analyst cites boost to lenders' balance sheets.

By Steve Gelsi

KBW bank analyst sees Fed rate cut improving bank balance sheets

Bank stocks moved up on Thursday as they added to gains from the previous session on the heels of the first interest-rate cut by the U.S. Federal Reserve since 2020.

The KBW Nasdaq Bank Index BKX rose 2.5% on Thursday, while the SPDR S&P Regional Banking exchange-traded fund KRE moved up by 3.1% and the Financial Select Sector SPDR ETF XLF advanced 1.1%.

Big regional-bank stocks posted solid gains: KeyCorp (KEY) jumped 4.3%, First Citizens Bancshares Inc. (FCNCA) rose 2.2%, Metropolitan Bank Holding Corp. (MCB) jumped nearly 6%, Comerica Inc. (CMA) rose 3.3% and Western Alliance Bancorp. (WAL) moved up by 4.2%.

Among the megabanks, Goldman Sachs Group Inc. (GS) jumped 4%, JPMorgan Chase & Co. (JPM) advanced by 1.5%, Bank of America Corp. (BAC) rose 2.8% and Morgan Stanley (MS) moved up 1.6%. Citigroup Inc. (C) rose 3.2% and Wells Fargo & Co. (WFC) jumped 3.1%.

Analysts said the Fed's 50-basis-point cut on Wednesday will help reduce the unrealized losses for banks on securities that were worth less when interest rates were higher.

KBW analyst Christopher McGratty told MarketWatch that this market dynamic is one reason bank stocks are rising. Another reason is the prospect that lower rates will stimulate economic activity and hiring.

"Lower rates will make concerns over credit lower," McGratty said. "The 50-basis-point cut says they're trying to get ahead of it."

It will also reduce the cost of borrowing, which will help provide more support for the commercial-real-estate sector, he said.

McGratty said regional banks will benefit more than the big, diversified banks because a greater portion of their business relies on net interest income from loans.

Comerica is one example of a bank stock that offers relative value, McGratty said.

KBW upgraded Comerica to outperform from hold on Sept. 4.

Moody's analyst Allen Tischler said the rate cuts may initially hurt banks' creditworthiness as their costs for holding deposits go down less quickly than the yields on their loans.

But longer term, deposit costs will ease and cause net interest income to strengthen.

The lower rates will also help asset quality at banks, Tischler said.

"Additionally, if lower rates prolong economic growth, it will help banks maintain and improve their asset quality," he said.

Also read: Moody's lifts outlook on four big regional banks to stable from negative

-Steve Gelsi

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09-19-24 1105ET

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