Trading Fed rate cuts: These banks are primed to outperform when rates fall, Evercore ISI says
A few well-known regional banks are poised to benefit from the Federal Reserve’s upcoming interest rate cuts, according to Evercore ISI. Fed Chair Jerome Powell indicated on Friday that the central bank is ready for interest rate cuts ahead , although he declined to provide the exact timing or extent of the cuts. As investors await the Fed’s moves, Evercore ISI used its updated asset/liability committee scenarios and several banks’ net interest income commentary to find which names appear strongest in a lower interest rate environment. “The banks are gradually becoming less asset sensitive as the Fed pivot approaches via remixing of balance sheets, securities restructurings, and hedging efforts,” analyst John Pancari said in a recent note to clients. Steps these banks have taken include reinvesting cash into securities to lock in higher rates, paying down higher cost debt and allowing costlier certificates of deposit to mature, he added. Comerica , Truist Financial , U.S. Bancorp and Fifth Third Bancorp are among the banks that are best-positioned from a net interest income, or NII, perspective as the Fed begins cutting rates, Pancari said. These names have outperformed the sector by the widest margin over the past month, as they’re the least asset sensitive and most liability-sensitive names, the analyst added, saying that their NII sensitivity has, so far, overshadowed credit concerns or market-driven fee income sensitivity. According to the note, Comerica, U.S. Bancorp and Fifth Third each forecast two interest rate cuts this year. Comerica shares are up 3% this year and 12.6% this quarter. After this outperformance, however, analysts polled by FactSet expected 4.6% potential downside for the regional bank. Comerica shares dipped more than 10% on July 19 after the company posted its second-quarter results. CEO Curtis Farmer noted at the time that ” persistently high rates ” pressured the bank’s deposits. Wall Street is more bullish on U.S. Bancorp and Fifth Third, meanwhile. Analysts project 8.8% and 3.9% potential upside for the stocks, respectively, per their consensus price targets on FactSet. This year, U.S. Bancorp shares are up 4.9% and Fifth Third is up more than 22%. Truist has gained 18.7% this year, but the stock is down 1.9% over the past month. Analysts polled by FactSet have a 12-month price target that suggests shares could jump 6.7%, however.
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