Evercore ISI: These bank stocks could do well as the Fed enters a loose cycle.
AInvestSunday, Aug 18, 2024 8:20 pm ET
1min read
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When the Fed hikes rates, banks' net interest income (NII) usually goes up. So when the central bank turns dovish, NII naturally falls. However, the reality is more complicated, according to John Pancari, an analyst at Evercore ISI, who recently explained in a note to clients.

In a model to help assess which banks are best positioned for a rate cut, the analyst used the latest asset-lightning committee disclosures to help. "However, the ALCO scenarios are only part of the story, as they typically rely on basic static balance sheets and thus do not include balance sheet restructurings or potential offsetting investment portfolio changes (though this approach is developing)," he wrote.

So Pancari created a more dynamic approach that added management commentary on interest rate sensitivity, 2024 NII guidance, and an assumption that every bank would cut rates to draw a more complete picture.

His basic argument is that as the Fed "de-sensitizes" banks through balance sheet restructurings, securities restructurings and offsetting, banks' "asset sensitivity will gradually decrease."

He concluded: "In short, offsetting efforts have also made progress, along with increased announced and completed securities restructurings, which could support a position of actual sensitivity that is lower/less than implied by the ALCO scenarios."

Pancari said from the NII perspective, CMA.US, Truist Financial (TFC.US), U.S. Bancorp (USB.US) and Fifth Third Bancorp (FITB.US) seem best positioned.

The dovish comments from Fed Chair Powell and below-consensus July jobs report have prompted a shift in the market to price in a 100-bps cut. Pancari said, along with heightened concerns about an intensifying economic recession, "this has prompted the market to shift to debt sensitive and those stocks that are perceived to be defensive in the credit cycle." However, with more encouraging economic data over the past week, this trend has reversed, with the market now pricing in a 75-bps cut in 2024.

The analyst said the best performing bank stocks are those with the lowest asset sensitivity and highest debt sensitivity, including CMA.US, Truist Financial, Fifth Third Bancorp and U.S. Bancorp, along with defensive U.S. Airways (AXP.US) and JPMorgan (JPM.US).

However, if the economic downturn is worse than expected, credit concerns could trump NII concerns, "thus having a more severe impact on stock performance," Pancari added.

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