MW The Fed is expected to hold rates steady. That will help banks, Moody's says.

By Steve Gelsi

A 'slower guide' by the Fed should help banks adjust their deposit pricing to boost their net interest income: analysts

An expected decision this week by the Federal Reserve to keep interest rates steady will help bottom lines in the banking sector, at least in the short term, Moody's Ratings analysts said.

"A slower glide path toward lower short-term rates supports banks," Moody's analyst Allen Tischler said in a report published on Monday.

By keeping rates where they are, banks will be able to adjust the pricing on their deposits to be more in step with falling loan yields pegged to floating interest rates, analyst said.

This will help their net interest income, which is the profit banks make on their loans minus the interest they pay out for deposits.

Banks have already signaled a boost to net interest income in their 2025 outlooks that they issued with their earnings updates this month.

So far, banks expect their net interest income to accelerate throughout the year to ring up 2025 growth in the mid-single-digit percentage range over 2024.

Slower rate moves by the Fed also give banks more time to tweak their pricing.

"When rates fall quickly, by contrast, the cost of some deposit categories takes time to catch up, although floating-rate assets reprice immediately," Tischler said.

While the yield curve for Treasurys had been inverted for two years, that trend started to shift late last year. The yield curve has since returned to its historical, upward slope.

This also helps banks, because it means their interest-earning assets such as loans and securities will increase in value over time under longer contracts than deposits, which adjust more quickly.

On the negative side, sustained, higher long-term interest rates could soften demand for loans, as borrowers wait for rates to go down, Moody's noted.

Higher long-term rates may also limit the ability of some borrowers to refinance their debt, particularly for commercial real-estate loans, Moody's said.

Higher-for-longer rates also boost unrealized securities losses, which may weaken capital positions for banks.

"With high rates, tight credit spreads and persistent market volatility, continued profitability for banks hinges on rapidly resolving commercial real-estate issues, having a deep playbook for multiple economic scenarios, and properly pricing risk in new loan growth," said Chris Stanley, Moody's banking-industry practice lead.

-Steve Gelsi

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January 28, 2025 12:19 ET (17:19 GMT)

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