Last month, the Federal Reserve enacted its first interest rate cut since 2020, slashing its key funds rate by 50 basis points. The cut was double what the conventional wisdom had expected, and markets jumped in the aftermath.
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Morgan Stanley banking expert Betsy Graseck is watching both Fed policy and the banking sector, and in her view, the Fed has only just begun paring back rates.
Looking at what the future likely holds in store for Fed policy, and for the outlook of US banks generally, Graseck writes, “Rate cuts are here, and the Fed is moving even faster than expected. After a 50bp cut in September, our economists expect another 150bps of rate cuts between now and the middle of 2025, with the US economy avoiding a recession.”
With this in mind, Graseck has identified “which banks should experience the most net interest margin (NIM) expansion/compression through the end of 2025, assuming that short-end rates come down 200bps, in line with our economists’ forecast.”
The analyst expects that a lower interest rate environment won’t have a ‘one size fits all’ effect on banking stocks. Exemplifying that outlook, she’s taken divergent stances on USB (NYSE:USB) and JPMorgan Chase (NYSE:JPM), choosing one as the best banking stock to buy as rates keep falling. Let’s take a closer look.
US Bancorp
US Bancorp, the first stock on our list, is the Minneapolis-based parent and holding company of U.S. Bank. With approximately $680 billion in total assets, USB is the seventh-largest banking company in the US, and it traces its roots back to 1863. Today, the company employs more than 70,000 people in over 2,000 branches across 26 states, with its presence concentrated in the Midwestern and Western regions of the country.
Customers can find a wide range of banking services through US Bank, the company’s operating arm. These include checking and savings accounts, credit cards, CD accounts, mortgages, investing tools, and other financial instruments, all made available to retail customers, businesses at all scales, and even high-net-worth individuals. The bank is accessible through its branches, its ATM network, and its online apps.
USB shares took a turn upwards in July after the company reported Q2 revenues and earnings that both beat the consensus estimates, as well as sound growth in deposit and loan activity.
At the top line, USB’s revenue for 2Q24 came to $6.876 billion. While down more than 4.5% year-over-year, the revenue beat the forecast by $70 million. The bottom-line earnings came to 97 cents per share in GAAP measures, or 2 cents ahead of the estimates. The bank’s average deposits increased from $503.1 billion to $513.9 billion quarter-over-quarter, and average total loans increased from $371.1 billion to $374.7 billion from Q1 to Q2; both of these factors should reflect positively in USB’s interest income and margins.
In her coverage of USB, Morgan Stanley’s Graseck focuses on the bank’s net interest margin and how that should impact investors’ perceptions of the stock. She writes, “USB has a relatively high concentration of interest bearing deposits which should reprice quickly as rates fall. This should drive robust NIM expansion in 2025 that is not currently reflected in consensus… Our analysis points to USB’s NIM expanding 20bps by 4Q25, which is second highest in our coverage. Among the Large Cap Banks, USB’s 2025e NII is 4.8% above consensus (highest) and 4Q25 NIM is 10bps above consensus (second highest.)”
With these comments in mind, it’s no wonder that Graseck has upgraded USB shares from Equal Weight to Overweight (Buy). Graseck has also raised her price target, from $54 to $57, suggesting a one-year upside for the stock of 28%. (To watch Graseck’s track record, click here)
Graseck’s view represents the Street’s most bullish take. The stock gets a Moderate Buy consensus rating, based on 16 reviews that include seven Buys and nine Holds. The shares are priced at $44.46 with an average target price of $46.13 implying a gain of 4% over the next year. (See USB stock forecast)
JPMorgan Chase
The second stock we’ll look at is JPMorgan Chase, a storied name in the US banking industry – and currently the US market’s largest bank, with over $4 trillion in total assets. JPM is based in New York City and traces its roots to the 1799 founding of the Bank of Manhattan Company, and its modern incarnation is the result of the merger, in 2000, of the Chase Manhattan and JPMorgan banks. Today, JPM is one of the ‘Big Four’ banking firms and one of the largest in the world. JPM averaged $2.4 trillion in deposits in the second quarter of this year, along with $1.3 trillion in loans.
The combination of JPM and Chase brings together an array of banking services, and puts them at the call of millions of customers worldwide. While the focus is on corporate services, investment banking, commercial banking, and asset and wealth management, the bank also offers consumer and community banking services and claims some 80 million retail and small business customers.
This is big business, of course, and in its last reported quarter – 2Q24 – JPM showed revenues of $50.2 billion. This was up more than 21% year-over-year, and beat the forecast by $4.54 billion. The firm’s bottom line figure came to $4.40 per share in non-GAAP measures, but missed the estimates by 11 cents per share.
JPM’s net interest income in the quarter hit $22.9 billion, a solid turnaround from the $1 billion reported in 2Q23. The bank expects to see $91 billion in net interest income for the full fiscal year 2024, an estimate described as ‘market dependent.’
Watching JPM, analyst Graseck sees this large bank treading water as the Fed’s interest rate policy shift. She writes, “While the analysis drove a 2% increase in JPM 2025 EPS, opportunities for positive surprise on NIM in 2025 are lower than the majority of our coverage, especially as JPM management has consistently reminded the Street that they are asset sensitive and over-earning on NII. We estimate deposit repricing alone will only benefit JPM’s NIM by gross 53bps, below median Large Cap Bank of 61bp. As a result, we model JPM’s NIM declining 13bps in 2Q24-4Q25 as the Fed cuts rates, the sharpest decline across our Large Cap Banks coverage.”
Graseck goes on to explain why the risk/reward on this large bank stock is no longer favorable, adding to her comments, “We see less positive surprises ahead for JPM following a strong run over the last two years… With stock trading at 2.2x tangible book against a 18% 2025 ROTCE and ROTCE poised to decline from here, the risk reward appears more balanced at current valuations.”
The Morgan Stanley analyst goes on to downgrade her stance on JPM, from Overweight to Equal Weight (Hold) although, interestingly, her price target is raised from $220 to $224, implying potential one-year upside of 8%.
The consensus rating here is also a Moderate Buy, based on 20 reviews that break down 14 to 6 in favor of Buy over Hold. The stock has a trading price of $207.04 and an average target price of $224.84, suggesting the stock will gain 8.5% in the months ahead. (See JPM stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
