As the third-quarter earnings season kicks off on Friday, investors are closely watching the biggest U.S. banks for insights into how the new Federal Reserve rate-cutting cycle will impact their financial performance. The spotlight will be on JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup, all of which are expected to report declines in net profits. With recent rate cuts and more reductions expected, the key question is how falling interest rates will affect banks’ lending margins, net interest income, and overall profitability.
The Impact of Rate Cuts on Big Banks
The Federal Reserve’s half-percentage-point rate cut on September 18 marked the beginning of a potential easing cycle that could continue into next year. While lower borrowing costs are expected to benefit consumers and businesses, they present a mixed bag for large banks. As the biggest institutions start reducing loan rates, a key source of interest income that boosted profits in 2022 and 2023 is under pressure.
At the same time, banks may also see a reduction in the cost of retaining customer deposits, which could eventually improve margins. However, with uncertainty surrounding how quickly deposit costs will adjust, investors remain anxious about how full-year trends will play out for the banking sector.
JPMorgan’s Earnings in Focus: The Risks and Rewards
JPMorgan Chase, the largest U.S. bank, is expected to be in the spotlight as investors look for clues about how rate cuts will impact net interest income (NII). The bank saw record profits during the Fed’s rate hikes to combat inflation, with its stock up over 24% this year, outperforming most peers. However, as rates begin to fall, JPMorgan is facing new challenges.
In recent quarters, rising deposit costs have already started to squeeze the bank’s NII. COO Daniel Pinto warned last month that the consensus estimate for NII in 2025 was “not very reasonable,” citing the impact of falling interest rates. His comments caused the bank’s stock to see its largest one-day drop since 2020.
Analysts are also adjusting their views on JPMorgan, with Morgan Stanley recently downgrading the stock, noting that the bank stands to benefit the least from falling rates due to its strong performance during the tightening cycle. With floating-rate loans expected to reprice lower, and deposit costs slower to adjust, the pressure on margins could continue.
Challenges Across the Banking Sector
The challenges faced by JPMorgan are shared by other major banks, including Wells Fargo, Bank of America, and Citigroup, all of which are set to report their earnings in the coming days. Analysts anticipate declines in net profits as elevated rates throughout most of the third quarter weighed on lending margins.
According to Moody’s Ratings senior vice president David Fanger, while deposit costs are expected to adjust slower than floating-rate assets, they will eventually catch up. This lag could limit the immediate benefits for the largest banks, which did not raise their deposit rates as aggressively as smaller regional institutions during the Fed’s tightening cycle.
Regional Banks Poised to Benefit as Rates Decline
While large banks face challenges, smaller regional banks could see a boost from the rate cuts. Many of these institutions experienced a significant increase in funding costs following the failures of Silicon Valley Bank and other regional lenders in 2023. As rates start to fall, regional banks are likely to benefit from “mean reversion” in deposit costs, helping to improve their margins.
According to Morgan Stanley’s analysis, mid-cap banks such as KeyCorp and PNC are positioned to gain the most from the current rate environment. KBW’s research indicates that earnings growth for large regional lenders could catch up to their bigger counterparts over the next year.
Will Lower Rates Bring Opportunities for the Banking Industry?
Despite the concerns surrounding falling net interest income, some investors see potential opportunities for the entire banking industry if the U.S. economy avoids a recession. Lower rates could stimulate deal-making and increase demand for new loans from both consumers and businesses, benefiting banks with substantial investment banking operations.
Argus Research director Stephen Biggar noted that the easing of monetary policy could prove to be “beneficial for banks and beneficial for the market,” adding that the recent high rates had “worn out their welcome.” If economic conditions stabilize and banks manage to adapt to the new rate environment, the sector could see growth in other areas, offsetting some of the pressure on margins.
Net Interest Income: A Key Metric to Watch
As third-quarter earnings are released, net interest income (NII) will be a crucial indicator of how well banks navigate the changing rate landscape. NII measures the difference between what banks earn on their assets and what they pay for deposits. For JPMorgan, which benefited significantly from higher rates, the challenge now is managing investor expectations while navigating a period of lower margins.
Daniel Pinto’s recent comments have set the stage for lower expectations, but the bank’s performance will still be closely scrutinized. Morgan Stanley’s downgrade of JPMorgan reflects a broader sentiment that the easy gains made during the Fed’s tightening cycle may be harder to replicate in the current environment.
Early Signs of Lower Deposit Rates
There is evidence that banks are reducing deposit rates in response to the Fed’s recent rate cuts. Curinos, a deposit advisory firm, reported that among the 500 U.S. banks it tracks, 78% have lowered rates on certificates of deposit (CDs) that were previously above 4%. Additionally, 50% of banks have reduced rates on savings and money market accounts that were above 4%.
These initial signs suggest that banks are beginning to adjust their pricing strategies, although it remains to be seen how quickly these changes will affect margins. The ability to lower deposit costs will be critical for banks as they look to offset the impact of lower interest income.
The beginning of the Fed’s rate-cutting cycle presents a new set of challenges and opportunities for the U.S. banking sector. As investors await third-quarter earnings, the focus will be on how major banks like JPMorgan Chase, Wells Fargo, Bank of America, and Citigroup manage the transition to lower rates. While some banks may face margin pressures, regional institutions could see improvements in funding costs. The evolving interest rate environment will shape the financial landscape, with net interest income, deposit rates, and lending trends all playing a crucial role in determining the sector’s future performance.
