Fed rate cut draws applause—and caution—from bankers

Enjoy complimentary access to top ideas and insights — selected by our editors.

It's been a few weeks since the U.S. central bank lowered its benchmark interest rate by 50 basis points, its first cut in more than four years, and bankers are optimistic about the prospect of a strong fourth quarter as a result. Executives say now that the ball is rolling, the Federal Reserve needs to be careful with the pace of future reductions.

Barometers like the KBW Nasdaq Bank Index ticked up by more than 1% in the hours following the Fed's announcement, with other bank stocks following suit as investment activity boomed.

Since then, leaders with the Federal Reserve Bank of Dallas and the $3.3 trillion-asset Bank of America have highlighted the importance of the cadence and the intensity of any planned rate cuts — slow and steady being the best approach.

"If the economy evolves as I currently expect, a strategy of gradually lowering the policy rate toward a more normal or neutral level can help manage the risks and achieve our goals," Lorie Logan, president of the Federal Reserve Bank of Dallas, said during remarks at the Securities Industry and Financial Markets Association's annual meeting in New York this month. "However, any number of shocks could influence what that path to normal will look like, how fast policy should move and where rates should settle."

They're not alone. Fed Gov. Michelle Bowman was the lone dissenting vote in the agency's decision for the half-percent cut last month, saying in a statement that "moving at a measured pace toward a more neutral policy stance" would be a more effective path to curbing inflation without "unnecessarily stoking demand."

Read more: What does the Fed's interest rate cut mean for investors?

In the third quarter, as in the previous quarter, credit proved to be a sticking point for U.S. banks.

Ally Financial recorded $357 million in net income for the third quarter, a 20% jump year over year, but also upped its credit-loss provisions to $645 million, from $508 million in the same period last year, as charge-offs for retail auto loans increased.

"I want to acknowledge the next few quarters will be choppy," Ally CEO Michael Rhodes said during the company's earnings call. "I remain confident in our franchise and our ability to deliver compelling returns."

The $119.2 billion-asset Synchrony Financial also raised its credit-loss provisions by $106 million year over year, to $1.6 billion for the third quarter, as higher net charge-offs as a percentage of average loans reached 6.06%.

Read more: Five areas to watch as banks report their Q3 earnings

Below are insights into the third-quarter performance of the top banks in the U.S. and how market factors have influenced subsequent investor activity.

Future credit issues ahead, JPMorgan Chase execs say

Gabby Jones/Bloomberg

Credit is proving to be a tricky area to tame for JPMorgan Chase, like many institutions across the U.S.

The nation's largest bank by assets saw a 40% year-over-year jump in net charge-offs for the three months that ended on Sept. 30 and upped its provisions for credit losses to $3.1 billion, from $1.4 billion in the same quarter last year.

Jeremy Barnum, the bank's chief financial officer, said during a conference call discussing its third-quarter earnings that these difficulties will persist across the coming months "as normalization continues … but we remain upbeat and focused on executing in order to continue delivering excellent returns through the cycle."

JPMorgan Chase's earnings-per-share performance beat analyst expectations at $4.37, compared with the forecasted $3.98 figure.

Read more: JPMorgan Chase forecasts more credit headwinds

Bank of America's loan growth predicts rising demand

JIN LEE/BLOOMBERG NEWS

Bank of America executives pointed out that despite the hesitation among business clients to make big investments, the bank's 1% growth in average loans is a positive sign.

"I don't know if that's early to call it a streak, but we're obviously pleased to see it," Alastair Borthwick, the $3.3 trillion-asset Charlotte, North Carolina-based bank's chief financial officer, told analysts on Oct. 15.

The company's third-quarter net profit of $6.9 billion was down from $7.8 billion year over year, but fees from its investment and brokerage divisions were up 15% across the same period of time. Sales and trading revenue was also up by 12%.

Read more: Bank of America's loan growth signals demand is creeping back

Citigroup execs say asset cap is unlikely

Following remarks from Sen. Elizabeth Warren, D-Mass., urging regulators to hamper Citigroup's growth, and after the growth of TD Bank Group's U.S. assets was capped, Citi CEO Jane Fraser quelled analyst worries about a similar restriction.

"Let me be crystal clear: We do not have an asset cap and there are no additional measures, other than what was announced in July, in place and [we are] not expecting any," she said.

The $2.4 trillion-asset bank has been facing significant regulatory headwinds since it was hit with two consecutive consent orders and a $400 million fine in the fall of 2020, stemming from vulnerabilities in its risk management and internal controls programs.

Warren's calls for a cap followed concerns that the bank has become "too big to manage." 

Read more: Citi not expecting an asset cap, CEO Fraser says

U.S. Bancorp slated for stronger growth in coming months

U.S. Bancorp executives are confident that despite modest loan demand in the third quarter, lowered interest rates that continue to trend downward will fuel stronger demand throughout the remainder of the year.

The $686 billion-asset bank's chief financial officer, John Stern, said in an interview with American Banker's Jim Dobbs that "there is definitely more interest" from borrowers following the Fed's interest rate cut last month, and that "the sentiment in the economy is positive."

Average total loans dropped slightly by 1% year over year, while net interest income was up to $4.1 billion, from $4 billion in the prior quarter."Bottom line, some mixed trends, but the NII performance was a real plus," Piper Sandler analyst Scott Siefers said.

Read more: U.S. Bancorp sees stronger growth ahead despite light lending activity

NYCB's Flagstar turnaround plans see 700 employees depart

Bing Guan/Bloomberg

As part of the beleaguered New York Community Bank's plans to revitalize its operations, Flagstar Bank is cutting 700 jobs — roughly 8% — of its overall headcount.

"While these strategic actions involve difficult decisions, including impacts on jobs, we believe they are essential for strengthening our financial foundation and building a more agile, competitive company," Chief Executive Officer Joseph Otting said on Oct. 17 in a statement that disclosed the figures. 

Executives also predict that the agreement to sell its mortgage-servicing business to Mr. Cooper will reduce its workforce by an additional 1,200 employees, many of whom would be transferred to Mr. Cooper when the deal is finalized at the end of the fourth quarter.

Read more: NYCB's Flagstar cuts 700 staff with more to depart in unit sale