Schwab leads list of banks expected to profit most in 2025 from Fed's rate cuts
By Philip van Doorn
Analysts predict a reversal of two years of earnings declines for the banking industry
The Federal Open Market Committee made a big splash on Sept. 18 when it cut the target range for the federal-funds rate by half a percentage point. But it takes time for financial results to reflect the declines in banks' funding costs for deposits and borrowings.
So we have looked ahead to 2025 to see which banks are expected to show the most improvement in their net interest margins.
Ahead of the decline in short-term interest rates, demand for longer-term bonds was soaring. Even now, the yield on 10-year U.S. Treasury notes BX:TMUBMUSD10Y is much lower than the yield on three-month Treasury bills BX:TMUBMUSD03M - this anticipates further cuts in short-term interest rates by the Federal Reserve.
The move by investors to scoop up longer-term bonds to lock in decent yields is another good development for banks because the unrealized losses on their securities portfolios are declining, which boosts earnings and relieves pressure on their capital ratios. All of that makes it easier for banks raise dividend payouts or to repurchase stock, which can boost earnings per share as their share counts decline.
Third-quarter earnings reporting season for banks begins on Oct. 11 when JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) report their results. With the quarter ending so soon after the Fed's move, investors will see another quarter of pressure on banks' margins - something they have been used to since the Fed began its cycle of rate increases in the second quarter of 2022.
It is important for investors to look further ahead. In their "Playbook for Lower Rates" published on Wednesday, analysts at Keefe, Bruyette & Woods led by Christopher McGratty predicted that two years of profit declines for the banking industry would be reversed with an estimated 8% increase in the industry's earnings-per-share in 2025, followed by a 12% increase in 2026.
The target range for the federal-funds rate is now 4.75% to 5%. The Federal Reserve's projections show a median federal-funds rate of 3.4% in 2025, falling to 2.9% in 2026.
These banks are expected to show the best improvement in their net interest margins
A bank's net interest margin (NIM) is the difference between the average interest rate it pays for deposits and borrowings and the average it earnings on loans and investments. There are various ways to calculate NIM, so for the following screen we used consensus estimates among analysts polled by FactSet for net interest income (interest earned less interest paid) and average earning assets for banks in 2024 and 2025.
Starting with banks in the S&P 1500 Composite Index XX:SP1500, we narrowed the list to those estimated to report net interest income of at least $1 billion for 2024. The S&P 1500 is made up of the S&P 500 SPX, the S&P MidCap 400 MID and the S&P Small Cap 600 SML.
Sometimes an investor might question whether or not a brokerage firm, such as Charles Schwab Corp. (SCHW), or a lender that doesn't have traditional bank branches, such as American Express Co. (AXP), should be considered to be a bank. For this screen, a financial services firm is considered to be a bank if it files Consolidated Financial Statements for Holding Companies - FR Y-9C with the Federal Reserve, or a call report with the FDIC.
From our screen of 50 banks, these 15 are expected to widen their net interest margins the most during 2025, based on consensus estimates among analysts polled by FactSet:
Charleston, W.VA. Ticker City Projected 2025 NIM improvement 2025 estimated net interest income/ average earning assets 2024 estimated net interest income/ average earning assets
Charles Schwab Corp. SCHW Westlake, Texas 0.54% 2.68% 2.14%
Ally Financial Inc. ALLY Detroit 0.45% 3.70% 3.25%
UMB Financial Corp. UMBF Kansas City, Mo. 0.41% 2.89% 2.48%
KeyCorp KEY Cleveland 0.41% 2.59% 2.18%
Banc of California Inc. BANC Santa Ana, Calif. 0.37% 3.20% 2.83%
Prosperity Bancshares Inc. PB Houston 0.28% 3.21% 2.93%
Pinnacle Financial Partners Inc. PNFP Nashville, Tenn. 0.16% 3.26% 3.10%
United Bankshares Inc. UBSI Charleston, W.V. 0.16% 3.64% 3.48%
BankUnited Inc. BKU Miami Lakes, Fla. 0.14% 2.85% 2.71%
Comerica Inc. CMA Dallas 0.15% 3.08% 2.93%
PNC Financial Services Group Inc. PNC Pittsburgh 0.13% 2.75% 2.62%
Valley National Bancorp VLY Morristown, N.J. 0.12% 2.97% 2.85%
American Express Co. AXP New York 0.12% 8.23% 8.11%
Cadence Bank CADE Tupelo, Miss. 0.11% 3.39% 3.28%
Citizens Financial Group Inc. CFG Providence, R.I. 0.11% 2.95% 2.84%
Source: FactSet
Schwab tops the list to show the most expected NIM improvement in 2025.
Investors will cheer wider margins, but what about the actual changes in net interest income? Leaving the list in the same order, here are those projections for 2025, along with estimated increases in earnings per share. The table also includes forward price-to-earnings ratios to the right, based on Thursday's closing prices and the 2025 EPS estimates. These are compared with long-term average P/E (based on rolling 12-month EPS estimates):
Bank Ticker Projected 2025 increase in net interest income Projected 2025 increase in EPS Price/ consensus 2025 EPS estimate 5-year average P/E 10-year average P/E Charles Schwab Corp. SCHW 18.6% 28.0% 16.3 18.3 19.9 Ally Financial Inc. ALLY 14.9% 71.3% 7.1 7.7 8.1 UMB Financial Corp. UMBF 60.9% 1.9% 11.4 12.5 14.7 KeyCorp KEY 20.4% 42.4% 10.6 9.8 10.5 Banc of California Inc. BANC 9.5% 220.1% 10.8 21.0 17.5 Prosperity Bancshares Inc. PB 10.2% 15.6% 12.1 12.4 13.2 Pinnacle Financial Partners Inc. PNFP 12.8% 16.6% 11.9 11.7 13.4 United Bankshares Inc. UBSI 13.9% -1.3% 13.3 13.7 15.4 BankUnited Inc. BKU 8.7% 13.5% 10.7 10.5 12.1 Comerica Inc. CMA 5.3% 9.8% 11.1 10.3 12.0
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