02:02 PM EDT, 10/14/2024 (MT Newswires) -- Banks' net interest income and margins are expected to come under pressure as the Federal Reserve eases its monetary policy but lower interest rates should also allow lenders to reduce their deposit costs, Raymond James said Monday.

Last month, the central bank's Federal Open Market Committee lowered its benchmark lending rate by 50 basis points to a range of 4.75% to 5%, its first cut since March 2020. Policymakers tightened monetary policy from March 2022 through July 2023 to combat inflation.

"We anticipate the immediate implication of future rate cuts on banks is lower lending rates on variable-rate loans, which will pressure (net interest income and net interest margin) near term for many banks," Raymond James analysts, including David Long, said in a note to clients. However, policy easing is also expected to reduce deposit pricing pressure and allow lenders to start lowering their cost of funds, the analysts said.

The firm expects total rate cuts of 100 basis points this year and another 100 in 2025. "Looking ahead, we believe a lower Fed funds rate will be a net benefit for banks due to the yield curve steepening its positive slope, which will allow for better spreads on loans and deposits in future quarters," the analysts wrote.

Recent remarks from an FOMC voting member suggest they're open to skipping a rate cut next month. Hence, some banking clients could move to secure loans to avoid the risk of paying a higher interest rate, which could occur if the Fed doesn't deliver additional rate cuts, the analysts said. "Conversely, with the likelihood of lower rates remaining high, and increasing clarity on the operating backdrop, we believe loan growth should improve in 2025."

Commercial loan growth is expected to see continued softness in the near term amid a slowing economy and weaker demand, according to the note. "As such, with rates still relatively high and some businesses operating conservatively until after the (presidential) election, we expect loan growth will be benign for most banks in (the third quarter)."

Some smaller banks that are well-capitalized are expected to have bought back shares in the September quarter, though overall capital deployment was likely limited, the analysts said.

On Friday, JPMorgan Chase's ( JPM ) third-quarter earnings unexpectedly rose year over year, while revenue topped market estimates, buoyed by gains in its investment banking operations. Separately, Wells Fargo ( WFC ) reported Friday that its third-quarter results declined on a yearly basis, but earnings topped market estimates as trading gains and investment banking fees helped drive noninterest income higher.

Both banks saw "strong" fundamental performances, Raymond James said Monday.

Bank of America ( BAC ) , Goldman Sachs ( GS ) , Citigroup ( C ) and Morgan Stanley (MS) are scheduled to report results later this week.

"Overall, we believe bank stocks are generally attractive as we favor a mix of more aggressive risk-on banks and (defense at a reasonable price) due to the combination of a more dovish Fed, the potential for the yield curve to steepen its positive slope, and lower (short-term) rates, supporting an improved credit outlook despite some (net interest margin) pressure," Raymond James said. "We remain constructive on certain liability-sensitive banks given the likelihood of rate cuts in (the fourth quarter) and 2025."

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