When the Federal Open Market Committee cut the goal range for the federal-funds rate by half a percentage point on September 18, it caused a big stir. But it takes time for banks’ financial results to show that their funding costs for savings and loans have gone down.
In order to find the banks whose net interest rates are most likely to get better in 2025, we looked ahead.
Before short-term interest rates went down, there was a huge market for longer-term bonds. Right now, the yield on 10-year U.S. Treasury notes (TMUBMUSD10Y 4.105%) is much lower than the yield on three-month Treasury bills (TMUBMUSD03M 4.633%). This is because people think the Federal Reserve will lower short-term interest rates even more.
Another good thing for banks is that investors are buying longer-term bonds to lock in good yields. This is because the unrealized losses on their securities portfolios are going down, which increases profits and lowers the stress on their capital ratios. All of this makes it easier for banks to raise dividends or buy back stock, which can help them make more money per share even though the number of shares they own is going down.
On Oct. 11, JPMorgan Chase & Co. (JPM 4.44%) and Wells Fargo & Co. (WFC 5.61%) are the first banks to report their third-quarter profits. Because the quarter ended so soon after the Fed’s move, investors will see another quarter of margin pressure on banks. This is something investors have been used to since the Fed started raising rates in the second quarter of 2022.
Investors need to think about the future. Analysts at Keefe, Bruyette & Woods, led by Christopher McGratty, wrote a report on Wednesday called “Playbook for Lower Rates.” In it, they said that the banking industry’s earnings-per-share would rise by 8% in 2025 and then by 12% in 2026, ending two years of declining profits.
There is now a goal range for the federal funds rate of 4.75% to 5%. According to the Federal Reserve, the median federal funds rate will be 3.4% in 2025 and 2.9% in 2026.
It is projected that these banks’ net interest margins will get better the most.
The net interest margin (NIM) of a bank is the difference between the average interest rate it earns on loans and assets and the average interest rate it pays on deposits and loans. As there are different ways to figure out NIM, we used the average earning assets for banks in 2024 and 2025, as well as the average net interest income (interest made minus interest paid) that analysts polled by FactSet.
First, we looked at banks in the S&P 1500 Composite Index SP1500 0.69%. Then, we picked out the ones that we thought would have net interest income of at least $1 billion in 2024. The SPX 500 makes up 0.61% of the S&P 1500. The MID 400 makes up 1.61%, and the SML 600 makes up 1.78%.
An investor might wonder if a brokerage firm, like Charles Schwab Corp. SCHW 1.55%, or a lender that doesn’t have traditional bank offices, like American Express Co. AXP 2.10%, really should be thought of as banks. A financial services company is seen as a bank on this screen if it files FR Y-9C (Consolidated Financial Statements for Holding Companies) with the Federal Reserve or a call report with the FDIC.
Income per share for Schwab is expected to rise 28% next year, and net interest income is expected to rise 18.6%.
When it comes to the bigger U.S. regional banks, KeyCorp KEY 2.26% stands out. Its expected increases for EPS are 42.4% and its expected increases for net interest income are 20.4%.
EPS for Banc of California BANC 3.43% should more than triple next year as the company gets past the extra costs it had to pay to reorganize after buying Western Pacific Bancorp in November 2023. Markdowns done on loans backed by rental properties in the bank’s CIVIC unit before they are sold in the second quarter have also hurt its 2024 earnings. The loan sale happened in the second quarter and brought in a net of $1.9 billion. This made the bank’s liquidity and capital levels better.
