Earnings season is set to begin on Friday, January 12, when companies including JPMorgan Chase (JPM), Bank of America (BAC), Wells Fargo (WFC), Delta Air Lines (DAL), and UnitedHealth (UNH) report their quarterly results. Regional banks tend to report early in the cycle. Wedbush Securities Managing Director David Chiaverini joins Yahoo Finance to give a preview.
Chiaverini argues that when the Federal Reserve starts cutting rates, it will be a positive for the regionals. However, he says that though the recent rally in regional banks stocks is "warranted," he thinks "upside is going to be limited, because I'm not expecting the Fed to be cutting as soon as what the market is predicting." He says higher-for-longer rates are still going to slow the economy, which will take a toll on the sector.
Chiaverini says the best positioned banks are those that have strong capital ratios and loan portfolios that will fare better during downturns. Find out which banks he likes by watching the video above.
Click here to watch the full interview on the Yahoo Finance YouTube page or you can watch this full episode of Yahoo Finance Live here.
Editor's note: This article was written by Stephanie Mikulich
Video Transcript
SEANA SMITH: It's great to see you. So right there at the top of your note, you stated the fact that you think the Fed pivot is going to bode well here for regionals. Is it still though too early to say that regional banks are out of the woods just yet?
DAVID CHIAVERINI: Yeah, good question. So I don't think banks are out of the woods. Now, the rally is warranted. But I think upside is going to be limited because I'm not expecting the Fed to be cutting as soon as what the market is predicting.
And I think these higher rates that we're living with are still going to slow the economy. And the lagged impact of all the rate increases that we've seen over the past year have yet to manifest in the economy. So I am expecting slowing economic growth-- this could impact credit quality for the banks-- and slow loan growth, which has been under pressure. So, no, I don't think that they're out of the woods just yet.
MADISON MILLS: And what about that higher-for-longer impact can we expect to come up most in the regional bank earnings? Is it that loan piece that you mentioned? Or is it more of the deposits that we've always been talking about with regionals?
DAVID CHIAVERINI: Yeah, it's a combination of both as well as with credit quality. So the deposit costs are likely to continue to increase but at a much slower pace. In fact, I expect deposit costs to plateau within the next quarter too. And net interest margins should trough. And net interest income should trough within the next couple of quarters.
So lower interest rates are helping on that side. Lower interest rates will also help on the credit quality front. But to your question about, you know, higher for longer, that's the big risk, is when these borrowers, particularly on the commercial real estate side, look to refinance their loans albeit at a incrementally lower rate than what was occurring, say, a month ago or two months ago, it's still a lot higher than when these loans were originally put on the books.
And that's where we could see some stress with some borrowers. And credit costs could end up moving higher from here and offsetting some of the impact of a rebound in net interest income in the back half of 2024.
SEANA SMITH: So, David, given the fact that there is still a lot of uncertainty ahead, there are still some risks out there, it sounds like investors, if they are looking at this space, still need to be a bit defensive. Who in your view is best positioned than at this point?
DAVID CHIAVERINI: Yeah, I would say banks that have strong capital ratios. That way, they'll be in position to put some capital to work if we do happen to get a soft landing, as well as defensive from the standpoint of if credit quality does weaken, those banks with higher stronger capital levels will be able to withstand the blows a bit better.
We also think that those banks with loan portfolios that tend to perform better in downturns should also be considered. So banks like-- you know, we like First Horizon here. We like First Citizens, East PacWest Bancorp, Fifth Third, Western Alliance, M&T Bank. These banks we think are better positioned for this type of backdrop.
