US bank stocks drop as Fed policymaker plays down rate-cut expectations

By Manya Saini

(Reuters) -U.S. bank stocks fell on Friday after a U.S. Federal Reserve policymaker dashed market expectations of interest-rate cuts early next year but were still trading close to the level last seen before the sector's crisis in March.

Expectations that a rate cut in early 2024 would help loan growth and lower deposit costs had powered gains in large and regional bank shares in the previous session.

"We aren't really talking about rate cuts right now," New York Federal Reserve President John Williams said in an interview with CNBC. "I just think it's just premature to be even thinking about that."

Shares in the banking sector had returned to their highest level since early March on Thursday when three mid-sized lenders collapsed due to liquidity crunch partly caused by the Fed's historic policy tightening campaign.

The KBW Regional Banking Index, which closed 4.15% higher in the previous session, dipped 1.5% in afternoon trading, while the S&P 500 Banks Index slipped 0.5%.

Among individual stocks, Regions Financial, Keycorp, Western Alliance and Truist Financial dropped between 1% and 2.9%.

Shares of JPMorgan Chase, Wells Fargo and Morgan Stanley were up between 0.2% and 0.6%, while Bank of America, Citigroup and Goldman Sachs were last down between 0.3% and 1.5%.

Still, Wall Street analysts pinned their hopes on the Fed's dovish stance in its latest meeting to remain optimistic about the sector going into 2024.

"We come out firmly on the side of the bulls. It's not a straight line up, but we think they will be higher a year from now and they will outperform the S&P 500," said Wells Fargo analyst Mike Mayo in an interview with Reuters.

Though higher borrowing costs boost interest income for the big lenders, a broad recovery in investor sentiment and lower rates are expected to help dealmaking power profit at their investment banking units.

"With interest rates potentially moving lower in 2024, the tailwinds of stable to lower funding cost, borrower alleviation, and improving capital levels should be enough to get investors back," said analysts at brokerage Truist Securities.

The index tracking a basket of large-cap bank stocks has surged nearly 21% so far in the quarter and 6.54% this year.

"The question is not why banks rallied so well in the recent period. It's why they sold off so extraordinarily through 2023," Mayo said.

(Reporting by Manya Saini in Bengaluru and Sinéad Carew in New York; Editing by Arun Koyyur and Krishna Chandra Eluri)

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