KBW analyst Chris McGratty says bank funding costs will go down as rates ease
The lower interest rates signaled by the Fed this week will decrease the cost of borrowing for banks to fund loans and other transactions, KBW banking analyst Chris McGratty noted.
This has helped trigger a surge in bank stocks that extended for a second day on Thursday following the Fed’s latest meeting.
“It feels like the rally in the banks was perhaps because [the Fed] didn’t take rate cuts off the table, despite some hotter inflation prints,” McGratty told MarketWatch. “The carrot of rate cuts is still in front of us.”
While higher interest rates may benefit banks by allowing them to charge more for loans, higher borrowing costs put a damper on transactions, McGratty said.
A cut in interest rates may stimulate more economic activity, which will benefit banks, he said.
Still, there’s no immediate change to the higher-for-longer interest-rate environment that has emerged as the economy has kept humming.
McGratty reiterated KBW’s top picks among big regional banks: East West Bancorp Inc. EWBC, +1.96%, Wintrust Financial Corp. WTFC, +0.89% and First Citizens Bancshares Inc. FCNCA, +2.07%.
“All of these banks do relatively well when rates are higher,” McGratty said. “Those are still stocks you want to continue to own.”
KBW remains neutral overall on bank stocks, however.
“It’s not that valuations are rich, it’s just that there’s no catalyst absent a material shift in the macro economy,” McGratty said. “We’re comfortable being neutral.”
East West Bancorp’s stock was up by 1.1% on Thursday, after rising 1.6% in the previous session on the heels of the Fed’s latest comments.
Investment bank Raymond James Financial Inc. RJF, +2.77% rose 2.5% to $125.67, on track for new all-time closing high.
Western Alliance Bancorp. WAL, +3.03% moved up by 2.8% and Banc of California Inc. BANC, +1.84% advanced by 1.3%.
New York Community Bancorp Inc. NYCB, +3.34% rose 3.6% and Wintrust Financial rose 0.6%.
The KBW Nasdaq Bank Index BKX moved up by 1.9% on Thursday, on top of a 2.4% gain on Wednesday. The index is currently up by 7.3% in 2024.
Among larger banks, Citigroup Inc. C, +2.00% rose 1.7%, Bank of America Corp. BAC, +2.07% moved up by 2%, JPMorgan Chase & Co. JPM, +1.39% rose 1.2% and Goldman Sachs Group Inc. GS, +4.35% rose by 4.8% as the top performer among the 30 stocks in the Dow Jones Industrial Average DJIA.