Bank Stocks Surge After Fed Signals Rate Cuts

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By Ronald Tech

These financial companies experienced a jump in their stock values after the U.S. Federal Reserve revealed intentions to cease the central bank’s rate hikes. Notably, SoFi Technologies (SOFI 12.45%) increased by a solid 12.5%, Bank of America (BAC 4.23%) rose by 4.2%, and Fifth Third Bancorp (FITB 5.96%) closed with a 6% gain. These sharp increases occurred amidst a broader market rally, with both the S&P 500 and Nasdaq Composite indexes soaring over 1.3% on Wednesday.

The Federal Reserve’s final 2023 meeting prompted officials to maintain the central bank’s benchmark interest rate within a targeted range of 5.25% to 5.5%. This marked the third consecutive month of unchanged rates after an extraordinary cycle of 11 rate hikes that commenced in March 2022.

In a significant revelation, members of the Federal Open Market Committee disclosed plans for at least three rate cuts in 2024, possibly in quarter-percentage-point increments.

Benefits and Disadvantages of Lower Rates for Banks

One might ask why bank stocks are rallying despite the traditionally positive impact of higher interest rates on banks. Generally, higher rates are beneficial for banks, leading to increased profits stemming from larger spreads between interest paid to customers and profits from investing these funds. However, the decision to aggressively raise interest rates aimed to combat soaring inflation, which has hampered consumer spending, borrowing, and overall economic growth. While banks can capitalize on higher rates to a certain extent, investors are right to anticipate an uptick in economic activity as the rate-hike cycle reverses.

Diverse Outcomes for Different Banks

Wednesday’s market rally fueled gains for several struggling bank stocks. Nevertheless, not all banks are equal, potentially explaining why SoFi Technologies experienced substantial gains. SoFi, renowned for its cutting-edge technology and lack of physical branches, has leveraged its digital-first approach to secure a national bank charter in early 2022. Additionally, it recently launched the banking-as-a-service platform, Cyberbank Digital, in late 2022.

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With its digital-first, mobile-centric strategy, SoFi consistently attracts hundreds of thousands of new customers with deposits rising by billions of dollars each quarter. In the last quarter alone, SoFi added 717,000 new members, totaling over 6.9 million, while deposits at SoFi Bank surged by $2.9 billion, a 23% sequential increase between the second and third quarters, reaching $15.7 billion. This substantial deposit base offers SoFi a cost-effective source for funding its burgeoning loan business. Furthermore, it maximizes net interest margin by holding loans on the balance sheet for longer durations, made possible after obtaining its bank charter.

Conversely, Bank of America’s deposit base remained relatively stagnant, hovering around $1.88 trillion, while Fifth Third Bank’s deposits experienced a modest 2% sequential increase in Q3, reaching $165.6 billion.

SoFi’s advantage becomes more apparent as the Fed prepares to slash rates in 2024. During an earnings conference call earlier this year, SoFi CEO Anthony Noto expressed confidence that the company should “be able to hold rates much longer and higher than our competitors and really gain even more market share” as rates inevitably decline.

The Federal Reserve’s recent decision to maintain rates while signaling future reductions in 2024 is undoubtedly a boon for bank stocks. Rather than spreading investments across numerous banks, concentrating on promising bank stocks like SoFi, poised for superior performance in the upcoming rate cycle, appears more favorable.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Steve Symington has positions in SoFi Technologies and has the following options: long January 2024 $15 calls on SoFi Technologies. The Motley Fool has positions in and recommends Bank of America. The Motley Fool has a disclosure policy.