The Federal Reserve’s decision to slash interest rates by 50 basis points on Wednesday has sent shockwaves through the financial world, particularly within the banking sector, especially among mid- and small-cap banks. With further rate cuts anticipated over the next two years, JPMorgan analyst Steven Alexopoulos believes this marks a pivotal turning point for the industry. These reductions are expected to significantly boost banks’ net interest margins (NIMs) while simultaneously reigniting commercial loan demand. The steepening yield curve and easing credit concerns will empower banks to recalibrate deposit costs, leading to improved performance across various segments. Let’s dive deeper into the investment opportunities across different bank segments as outlined by Alexopoulos.
Large-Cap Banks: Poised for Growth
First Citizens stands out with its SVB segment poised to benefit significantly from the Fed’s cuts. Lower rates are expected to revitalize venture capital (VC) investment and IPO activity, bolstering the company’s sizable SVB loans and deposits. Trading at a discount to its peers, First Citizens offers a compelling value proposition. Alexopoulos also anticipates potential for significant multiple expansion as the market re-evaluates its value.
Huntington is strategically positioned to capitalize on the improving commercial and industrial (C&I) loan demand by proactively hiring bankers in growth markets like the Carolinas and Texas. The Fed’s easing stance is anticipated to accelerate earnings, drive strong loan growth, and solidify Huntington’s position within the sector.
As the Fed eases its monetary policy, M&T’s previously criticized loans are projected to witness an improvement in credit quality, particularly in the commercial real estate (CRE) sector. This improvement will likely reduce the bank’s need for high reserve levels, paving the way for increased buybacks. The analyst suggests that M&T, currently trading below its historical valuation, presents an opportunity for re-rating as the economic outlook brightens.
Mid-Cap Banks: Reaping the Benefits of Lower Rates
Western Alliance stands to benefit from the lower rate environment by seizing opportunities to reduce deposit costs and mitigate credit concerns. Alexopoulos highlights Western Alliance’s exposure to the startup economy and capital call lending, positioning it well to capitalize on a potential resurgence in venture capital and IPO markets. This makes Western Alliance a standout mid-cap pick.
Pinnacle plans to lower its high deposit rates, leading to a boost in net interest income (NII). The analyst emphasizes Pinnacle’s operations in high-growth markets in the Southeast, coupled with its above-peer loan growth. This, combined with easing concerns around credit quality, makes Pinnacle an attractive investment as the Fed continues its rate cuts.
Despite its asset-sensitive balance sheet, Cullen/Frost will benefit from the Fed’s cuts by focusing on organic expansion in Texas’s fastest-growing cities. The potential for improved loan demand, particularly in commercial real estate, is expected to drive outsized growth. Alexopoulos views this as a revaluation opportunity for Cullen/Frost stock.
Small-Cap Banks: Ready for Resurgence
Live Oak, with a majority of its deposits in market-rate accounts, anticipates a significant reset in funding costs as rates decline. This niche growth bank aims to lead loan growth by leveraging improved borrower demand as borrowing cost uncertainty fades.
Metropolitan stands to benefit from easing concerns around its CRE loans, with the Fed’s cuts reducing anxieties about credit quality. The bank’s unique focus on niche sectors and proactive credit management positions it well for an economic rebound.
Amalgamated, a smaller player exposed to high credit risk profiles, will experience improvements as rates decline. The bank’s focus on social impact banking, coupled with a favorable rate environment, should alleviate concerns around credit stress. Alexopoulos sees this as providing room for upside in Amalgamated’s share price.
As the Fed signals further easing, banks across all segments will capitalize on improving economic conditions, rising loan demand, and a recalibration of deposit costs. With the runway for a soft landing widening, now is a compelling time to consider these names for your portfolio.
