Is the rotation of the US financial sector coming? Jefferies: Rate cuts have a greater impact on large banks, regional banks are "more attractive"

According to CNBC, Jefferies recently wrote in a report to clients that a rate cut by the Federal Reserve may have a greater negative impact on large banks as they are more sensitive to the asset side, while regional banks are more neutral to short-term and policy-sensitive interest rates. Analyst Ken Usdin from the investment bank obtained forward guidance from the second quarter of 2024 earnings, stating that most of the banks he studied expect annual growth in Net Interest Income (NII). Net Interest Income refers to the profit banks make when interest income from loans and investments exceeds interest expenses from deposits and other borrowings. Usdin stated in a report last Tuesday, "Despite loan growth coming in below expectations, strong deposit balances and better pricing dynamics have led most banks to reaffirm NII guidance." Banks generally believe there will be one to two rate cuts in 2024, lower than the market's current expectation of around five cuts. Usdin pointed out that giant banks such as Bank of America (BAC.US), Wells Fargo (WFC.US), and JPMorgan Chase (JPM.US) are generally asset-sensitive to short-term U.S. Treasury yield curves, while regional banks are "asset-sensitive to the repricing of fixed-rate assets along the mid-term (5-year U.S. Treasury yield) and long-term (10-year, 30-year U.S. Treasury yield) curves." The analyst believes that the recent decline in U.S. Treasury yields, influenced by softening macroeconomic prospects, may signal poor NII prospects from the second half of 2024 to 2025. "As a counterbalance, lower-than-expected asset yield rates may be offset by faster declining deposit betas and recovering trading volume." "The deposit beta index" measures the impact of changes in benchmark interest rates on bank deposit rates, indicating the extent to which banks pass on percentage changes in market rates to customers. For example, if market rates rise by 1%, deposit rates rise by 0.6%, then the deposit beta coefficient would be 0.6. In the large regional bank sector, Comerica (CMA.US) and Citizens Financial Group (CFG.US) are expected to see a quarter-on-quarter decline in NII for the third quarter. Looking at the whole year, NII for Comerica, Fifth Third Bancorp (FITB.US), Huntington Bancshares (HBAN.US), KeyCorp (KEY.US), and Truist Financial (TFC.US) are all declining. Please note that Fifth Third, Truist (TFC.US), PNC Financial Services Group (PNC.US), Regions Financial (RF.US), and Huntington (HBAN.US) are all expected to see a quarter-on-quarter increase in NII for the third quarter. Comerica and Citizens Financial are expected to see a quarter-on-quarter growth in the fourth quarter Major banks expected to see a decline in NII in 2024 include Bank of America, Citigroup (C.US), and Wells Fargo. Among trust banks, Bank of New York Mellon (BK.US) expects a 10% decrease in NII in 2024, while State Street Bank (STT.US) believes this profitability indicator will slightly increase compared to the same period last year. HSBC analyst Saul Martinez believes that the second-quarter earnings of regional banks support the view that NII has reached a positive turning point, with the possibility of continuous growth in the second half of 2024. In a report on August 4th, he wrote: "For many banks, the improvement in NII in the second half of the year is crucial for achieving operational leverage and double-digit EPS growth in 2025." Similarly, Morgan Stanley analyst Manan Gosalia, after reviewing second-quarter performance, is more confident that NII for mid-sized banks is at a turning point. The analyst wrote in a report: "This will initially be driven by improvements in net interest margins as banks can quickly cut deposit costs. The acceleration of industry-wide loan growth in 2025 should be a gradual driver." Overall, bank stocks performed well in the second quarter. For example, John Stern, Senior Executive Vice President and Chief Financial Officer of U.S. Bancorp (USB.US), stated during the earnings conference call that the second-quarter NII was boosted by "deposit growth, stable pricing, slower migration, repricing of fixed assets, improvement in loan portfolios, and actions to optimize cash balances in other investment portfolios." Meanwhile, Bank of America's NII has been declining since the first quarter, with management attributing this to "rising funding costs and deposit rotation seeking higher-yielding alternatives." Wells Fargo also saw a sequential decline in net income, but CEO Charlie Scharf noted that the growth in non-interest income fully offset this decline