The growing prospect of interest rate cuts from the Federal Reserve gives hope that the credit crunch for US banks could end soon, but bankers warn that it will take a long time for relief to materialize. visible.
“What we’re hearing from clients is that they need to see … somewhere between 75 or 100 rate cuts before they go from being cautious about investing in a business to being more aggressive,” Fifth Third (FITB) CEO Tim Spence told Yahoo Finance in a recent interview.
A single segment “isn’t going to make anyone’s dreams come true,” Frost Bank (CFR) CEO Phil Green added in a separate interview.
Fed Chairman Jerome Powell said on Wednesday that a cut in September could be “on the table” as long as the data supports it, and suggested that the first cut could be 25 basis points.
New evidence of a sluggish job market released on Friday made traders even more aggressive, estimating a 70% chance of a halving of output next month.
On the same day, the index tracking US bank stocks (^BKX) fell 4.3%, the biggest daily decline since May 2023. The index is still up 10% year to date until now.
Banks are waiting two years for the fees to return. High interest rates have proven to be a major challenge for lenders who struggle with high financing costs, low-yielding investments, and exposure to the weaknesses of commercial and consumer borrowers.
High interest rates have also stifled new lending, making it difficult for banks to grow. Quarterly loan growth at all US commercial banks is at its lowest level in nearly two years, according to Federal Reserve data.
Since the spring of last year, that number has stood below the historical average of ten years. Less demand is for new business loans.
‘Anybody’s Thoughts’
As interest rates begin to fall, the hope is that many of these problems will begin to ease.
How quickly that happens depends in part on how quickly the US economy begins to recover. In fact, if the US falls to the ground, the demand for loans will take longer to develop.
Even if the economy avoids a recession, the credit crunch is likely to limit interest rate cuts for several months, analysts and bankers said.
At this point, “it’s kind of anybody’s guess,” Scott Siefers, a banking analyst for Piper Sandler, told Yahoo Finance.
Uncertainty about the outcome of the US presidential election in November may also play a role.
“Whether we measure this in terms of fundamentals or time, it looks like it will now be the first event in 2025,” Siefers added.
Many bank management teams started the year predicting a recovery in loans in the second half of 2024, but will begin to reverse those forecasts in April.
By July most banks had pushed loan growth forward or canceled it entirely from their previous guidance.
“We’re kind of tired of saying, hey, credit growth will come at some point. So we took it out early,” PNC (PNC) CEO Bill Demchak told analysts in mid-July.
He added: “If it comes out, we will benefit like everyone else.
Banks have other ways to do better next year even when loans aren’t available: They can refinance their loans and bonds at higher rates.
Some are already taking those steps. PNC, Truist (TFC), and others took billions of dollars in losses by selling underwater bonds and used that money to buy new securities at very high interest rates.
But there is no doubt that the reform of lending would help.
Banks are “all waiting for this point of lending,” Tim Coffey, an analyst at Janney Montgomery Scott, told Yahoo Finance.
“So if they’re reluctant to show ‘we’re all in the clear,’ I understand that, but I still see a way once the rates come down,” Coffey added.
The first part, however small, can trigger a change in attitude.
“People are going to start seeing that the cost of money is going to come down so I think you’re going to see more confidence,” Frost Bank’s Green told Yahoo Finance.
David Hollerith is a senior reporter for Yahoo Finance covering banking, crypto, and other financial areas.
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