Magazine article American Banker

Fed Slashing Anticipated, Not Exactly Celebrated

Magazine article American Banker

Fed Slashing Anticipated, Not Exactly Celebrated

Article excerpt

Interest rate cuts have long translated into an immediate rally in bank stocks, but this time around the market may not be so jubilant.

The Federal Open Market Committee is expected to lower interest rates today for the first time this year. But it would be yet another in a series of reductions the Fed has made since early 2001, and the ugly secret among bankers is that the low rates are starting to eat into bank profits.

Some analysts have already said they consider a rate cut to be a negative to bank earnings and share prices.

The signs were already there in the third quarter, when many banking companies reported lower net interest margins -- the profit banks make from lending at rates above their own borrowing costs.

As banks trim the interest they charge on loans, they still have to pay out for deposits; the rates they can offer on deposit profits and still hope to win customers are getting close to the bottom of the scale.

Meanwhile, mortgage origination, at record levels over the past year, is slowing and commercial loan growth remains muted. That makes it harder for banks to put deposit inflows to work.

Another interest rate cut would put more pressure on already narrow net interest margins into next year, said Christopher Marinac, an analyst with SunTrust Robinson Humphrey. "Fed action also could be interpreted as a sign that credit quality will worsen," he said.

Lori B. Appelbaum, an analyst with Goldman, Sachs & Co., said in a research note Monday that bank profits from lending, which would be lower even if interest rates stayed the same, could drop 20 basis points or more if the Fed lowers rates by 75 basis points this year. …

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