The big question hanging over banks as earnings season starts

Investors have questions about how a new Federal Reserve rate-cutting cycle will affect the biggest US banks, and they will be looking for some answers as third-quarter earnings season begins Friday.

First up are results from JPMorgan Chase (JPM) and Wells Fargo (WFC), followed by Bank of America (BAC) and Citigroup (C) next week.

All four of those big banks are expected by analysts to report that their net profits fell when compared with the prior quarter and the year-ago period, as elevated rates in place for most of the third quarter chipped away at lending margins.

But after the Fed cut its benchmark rate by a half-percentage point on Sept. 18, with more reductions expected this year and next, the more important question for many investors is what happens to future margins as borrowing costs start to drop.

The biggest institutions are already lowering how much they charge new borrowers, cutting into a key source of interest income that boosted profits in 2022 and 2023 as the Fed pushed rates higher.

But there is also a good chance they won’t have to pay as much to retain their customer deposits, which could lower their costs and boost margins over time.

How all of this plays out is still a big unknown, and investors will be listening this week and next for any changes to future outlooks based on the Fed’s new rate path.

“I sense a little anxiety about full-year trends and just how the banks will contend with a swift movement in rates,” Scott Siefers, a managing director and equity analyst for Piper Sandler, told Yahoo Finance.