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These stocks have high dividend growth + high free cash flow yield
Oct. 10, 2024 3:20 PM ET| S&P 500 Index (SP500)| LEA, HPQ, IPG, TPR, BBWI, AMGN, KBH, QCOM, CVS, PHM, DOX, MRK, WYNN, SWKS, ADM, AMKR, CI, SNX, LEN, MCK, EME, RS, SNA, DAL, OC, WCC, TEL, CF, AGCO, SSNC, NXPI, WWD, MTDR, BERY, BCC, FOXA, HPE, PR, DELL, VST, LW, CWEN, SIRI...|By: Monica L. Correa, SA News Editor| 6 Comments
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Stocks with high dividend growth and high free cash flow yield can generate more returns than stocks seeing high dividend growth alone, according to a Wolfe Research note.
This defensive strategy has historically outperformed the S&P 500 ( SP500) by 500 basis points annually, said Chris Senyek, chief investment strategist.
The following are companies with high dividend growth in a last-twelve-month basis, and a high unlevered free cash flow yield.
- Twenty-First Century Fox ( FOXA) – 2024 FCF yield: 8.9%; Last 12-month dividend growth: 4%
- The Interpublic Group of Companies ( IPG) – 2024 FCF yield: 8.6%; Last 12-month dividend growth: 7%
- Sirius XM Holdings ( SIRI) – 2024 FCF yield: 8.9%; Last 12-month dividend growth: 12%
- Wynn Resorts ( WYNN) – 2024 FCF yield: 6.6%; Last 12-month dividend growth: 300%
- Lennar Corp. ( LEN) – 2024 FCF yield: 7%; Last 12-month dividend growth: 16%
- PulteGroup Inc. ( PHM) – 2024 FCF yield: 6.4%; Last 12-month dividend growth: 23%
- Tapestry ( TPR) – 2024 FCF yield: 8.8%; Last 12-month dividend growth: 17%
- Bath & Body Works ( BBWI) – 2024 FCF yield: 8.2%; Last 12-month dividend growth: 33%
- Lear Corp. ( LEA) – 2024 FCF yield: 7.1%; Last 12-month dividend growth: 33%
- KB Home ( KBH) – 2024 FCF yield: 6.2%; Last 12-month dividend growth: 42%
- Archer-Daniels-Midland Co. ( ADM) – 2024 FCF yield: 7.6%; Last 12-month dividend growth: 12%
- Lamb Weston ( LW) – 2024 FCF yield: 8.1%; Last 12-month dividend growth: 21%
- Permian Resources ( PR) – 2024 FCF yield: 10.3%; Last 12-month dividend growth: 185%
- Matador Resources Co. ( MTDR) – 2024 FCF yield: 9.2%; Last 12-month dividend growth: 50%
- Merck & Co. ( MRK) – 2024 FCF yield: 6.3%; Last 12-month dividend growth: 6%
- Amgen Inc. ( AMGN) – 2024 FCF yield: 6.1%; Last 12-month dividend growth: 8%
- Cigna Group ( CI) – 2024 FCF yield: 9.1%; Last 12-month dividend growth: 12%
- CVS Health ( CVS) – 2024 FCF yield: 6.8%; Last 12-month dividend growth: 10%
- McKesson Corp. ( MCK) – 2024 FCF yield: 8.2%; Last 12-month dividend growth: 15%
- Delta Air Lines ( DAL) – 2024 FCF yield: 7.3%; Last 12-month dividend growth: 350%
- EMCOR Group Inc. ( EME) – 2024 FCF yield: 4.7%; Last 12-month dividend growth: 30%
- SS&C Tech Holdings ( SSNC) – 2024 FCF yield: 5.2%; Last 12-month dividend growth: 20%
- Snap-on Inc. ( SNA) – 2024 FCF yield: 7.2%; Last 12-month dividend growth: 25%
- Owens Corning ( OC) – 2024 FCF yield: 6.3%; Last 12-month dividend growth: 21%
- Woodward Inc. ( WWD) – 2024 FCF yield: 4.6%; Last 12-month dividend growth: 15%
- WESCO International ( WCC) – 2024 FCF yield: 8.6%; Last 12-month dividend growth: 108%
- AGCO Corp. ( AGCO) – 2024 FCF yield: 5.7%; Last 12-month dividend growth: 15%
- Boise Cascade Co. ( BCC) – 2024 FCF yield: 6.5%; Last 12-month dividend growth: 40%
- QUALCOMM Inc. ( QCOM) – 2024 FCF yield: 5.1%; Last 12-month dividend growth: 41%
- Dell Technologies Inc. ( DELL) – 2024 FCF yield: 4.9%; Last 12-month dividend growth: 17%
- NXP Semiconductors NV ( NXPI) – 2024 FCF yield: 4.5%; Last 12-month dividend growth: 9%
- TE Connectivity Ltd. ( TEL) – 2024 FCF yield: 6%; Last 12-month dividend growth: 7%
- HP ( HPQ) – 2024 FCF yield: 8.1%; Last 12-month dividend growth: 7%
- Hewlett Packard Enterprise ( HPE) – 2024 FCF yield: 6.2%; Last 12-month dividend growth: 6%
- Skyworks Solutions Inc. ( SWKS) – 2024 FCF yield: 5.8%; Last 12-month dividend growth: 10%
- Amdocs Limited ( DOX) – 2024 FCF yield: 5.4%; Last 12-month dividend growth: 10%
- SYNNEX Corp. ( SNX) – 2024 FCF yield: 9.5%; Last 12-month dividend growth: 15%
- Amkor Tech ( AMKR) – 2024 FCF yield: 6.1%; Last 12-month dividend growth: 10%
- CF Industries Holdings ( CF) – 2024 FCF yield: 9%; Last 12-month dividend growth: 13%
- Reliance Steel & Aluminum Co. ( RS) – 2024 FCF yield: 5.6%; Last 12-month dividend growth: 12%
- Berry Plastics Group Inc. ( BERY) – 2024 FCF yield: 6%; Last 12-month dividend growth: 45%
- Vistra Energy Corp. ( VST) – 2024 FCF yield: 4.2%; Last 12-month dividend growth: 12%
- Clearway Energy Inc. ( CWEN) – 2024 FCF yield: 4.3%; Last 12-month dividend growth: 8%
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| To: Johnny Canuck who wrote (60347) | 10/10/2024 6:27:26 PM | | From: Johnny Canuck | | | | Skip to content
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Palantir: It's Time To Get Off The Train (Rating Downgrade)
Oct. 09, 2024 8:30 AM ET Palantir Technologies Inc. (PLTR) Stock XLK 76 Comments
JR Research
Investing Group Leader
(7min)
Summary- Palantir stock has surged over 120% in the past year, outperforming the market.
- PLTR's recent inclusion in the S&P 500 has driven another surge as investors rushed in.
- I explain why its frothy valuations are increasingly challenging to justify, notwithstanding the buoyant market sentiments.
- Palantir's go-to-market strategy and ability to scale its AI platform have been validated. But has too much optimism been priced in?
- I explain why it's time for investors sitting on significant gains to consider selling and cashing in before the dominoes potentially collapse.
- I am JR research, an opportunistic investor who identifies attractive risk/reward opportunities supported by robust price action to potentially generate alpha well above the S&P 500. I run the investing group Ultimate Growth Investing.
hapabapa
Palantir Investors Have Gone On A Rampage Palantir Technologies Inc. (NYSE: PLTR) investors have helped the stock go on a blistering run as it briefly broke above the pivotal $40 level last week. As a result, PLTR has continued its stellar market outperformance since its bottom in December 2022. Accordingly, the stock delivered a total one-year return exceeding 120%, lifting its valuations further into "nosebleed" levels. The AI platform has likely turned the corner in its government business, even as it ramps up its commercial offerings through its AIP boot camps. Hence, investor sentiments on PLTR have surged through the roof, bolstered by its recent S&P 500 inclusion.
Notwithstanding the relative caution demonstrated by Wall Street analysts on PLTR, investors have confidently brushed aside signs of froth. Despite that, PLTR's buying sentiments are likely nearing "irrational exuberance" levels. Palantir's inclusion in the S&P 500 has validated the sustainability of Palantir's earnings profile. However, it's also hard to argue that the market hasn't priced in the optimism, given its incredible surge. PLTR's nearly 50% public ownership has also been a significant source of support for the stock. However, the recent insider sales have also reached "feverish" highs, as CEO Alex Karp and Peter Thiel unloaded significant holdings, capitalizing on the market's optimism.
In my previous Hold rating on PLTR, I argued that the company's solid Q2 report underscored its remarkable turnaround and highlighted the AI platform's value proposition. Its novel boot camp concept has also proven its go-to-market strategy, as more than 100 organizations signed up for its AIPCon in September 2024. However, investors must question whether getting on board PLTR's train at the current levels still makes sense. In addition, should investors sitting on significant gains consider leveraging the recent surge to take some profits and reallocate?
PLTR Stock: Valuations Have Reached Frothy Levels
 PLTR Valuation Metrics (Seeking Alpha)
As seen above, PLTR's forward adjusted EBITDA multiple has surged close to 90x, significantly above its tech sector ( XLK) median of 14.4x. It's also markedly above its software peer median of 20x (according to S&P Cap IQ data). As a result, I find it increasingly challenging to justify the market's optimism on PLTR, notwithstanding its continued outperformance.
I assess that Palantir's AI platform has won critical acclaim from well-established technology reviewers. Coupled with the improved traction from its boot camp as it demonstrated its platform's efficacy and use cases, it could lift its operating metrics further. In addition, Palantir has upped the ante as it seeks new growth optionalities in edge AI use cases, broadening potential industry adoption. Hence, it could accelerate its growth momentum as the company aims to leverage its platform advantages over its peers.
In addition, Palantir has also demonstrated the inherent flexibility and scalability of its multi-agent systems in its Customer Service Engine. The company aims to help manage complex customer queries more effectively while scaling the systems without reconfiguring them extensively. Coupled with Palantir's ontology-driven capabilities, it helps to provide the appropriate context for effective enterprise deployment, improving the reliability and accuracy of its CSE. Coupled with the platform's ability to leverage multiple LLMs, customers are not limited to a single foundation model, allowing them to exploit the strengths of various models within the same platform.
Palantir's "Irrational Exuberance" Is Hard To Justify
 Palantir free cash flow margins estimates % (TIKR)
In addition, Palantir has also delivered more contractual wins recently, corroborating the improved buying sentiments on the stock. However, investors are urged not to throw caution to the wind, as its valuation has reached frothy levels that could be highly challenging to justify.
The company's free cash flow margins are expected to continue scaling up, supporting its recent optimism. Despite that, can investors expect Palantir to deliver significant revenue growth rates over the next ten years to justify its current valuation? Let's use a simple reverse DCF model to assess the "irrational exuberance."
| Assumptions | Metrics | | Annual hurdle rate | 15% | | Current valuation | $89.6B | | Required FCF yield after 10 years | 4.5% | | Assumed FCF margin after 10 years | 42% | | Target valuation after 10 years | $362.5B | | Required annualized revenue growth rate | 30.3% | PLTR stock reverse DCF model. Data source: Author, S&P Cap IQ data
As seen above, a hurdle rate of 15% for a high-growth stock like PLTR shouldn't be construed as too aggressive. Given its valuation, a lower hurdle rate might not attract growth-oriented investors, as they could consider allocating to the Nasdaq ( QQQ) ( NDX) or the S&P 500 at significantly lower valuation levels.
Therefore, investors investing in PLTR at the current levels are likely anticipating an annualized revenue growth rate above 30% over the next ten years. While that's not impossible, I believe it requires near-perfect execution to deliver such growth rates consistently without disappointing investors. In other words, the margin of safety at the current levels is seemingly non-existent.
Consequently, I assess investors who joined the bandwagon recently as possibly ending up with massive disappointment, as PLTR's valuations have baked in significant growth prospects over the next ten years. If you are sitting on substantial gains, it's timely to consider taking profits.
Rating: Downgrade to Sell.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Consider this article as supplementing your required research. Please always apply independent thinking. Note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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JR Research is an opportunistic investor who identifies attractive risk/reward opportunities supported by robust price action to potentially generate alpha well above the S&P 500. He tends to avoid overhyped and overvalued stocks while capitalizing on battered stocks with significant upside recovery possibilities. He runs the investing group Ultimate Growth Investing, which specializes in identifying high-potential opportunities across various sectors. The group is designed for aggressive investors seeking to capitalize on high-growth opportunities, and investors looking for growth opportunities at a reasonable price. Learn more. Take advantage of my expertise and join the Ultimate Growth Investing community today. Benefit from my market insights, investment recommendations, and in-depth analyses to enhance your portfolio and navigate the investing landscape with confidence. Learn more about how Ultimate Growth Investing can help you today.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of QQQ either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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| To: Johnny Canuck who wrote (60348) | 10/10/2024 6:30:11 PM | | From: Johnny Canuck | | | |
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AMD dips after unveiling new AI chip, CPU at showcase event
Oct. 10, 2024 2:12 PM ET| Advanced Micro Devices, Inc. (AMD) Stock| MSFT, ORCL, INTC, NVDA, LNVGY, LNVGF, META...|By: Ravikash Bakolia, SA News Editor| 23 Comments
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Advanced Micro Devices' (NASDAQ: AMD) stock fell about 4% on Thursday amid CEO Lisa Su unveiling new artificial intelligence processors at its Advancing AI 2024 event in San Francisco on Thursday, stepping up efforts to challenge market leader Nvidia ( NVDA).
The company showed off its new Turin EPYC data center CPUs and an Instinct MI325x AI accelerator. Su also unveiled Ryzen AI PRO 300 Series, the first Microsoft ( MSFT) Copilot + laptops designed for enterprise, according to the company.
AMD touted MI325x to be better than Nvidia's H200 HGX on several parameters. Meanwhile, the company called the fifth generation AMD EPYC the world's best CPU for Cloud, Enterprise and AI.
AMD noted that the EPYC 5th Gen 9965 is the industry's highest performing server CPU, by showing that it is better than the company's 4th Gen 9754 and Intel's ( INTC) Xeon 5th Gen 8592+.
At the Computex 2024 show in Taipei in June, the company introduced its latest AI processors and provided a roadmap to develop AI chips over the next two years. Su had unveiled the AMD Instinct MI325X accelerator, and the AMD Instinct MI350 series accelerators based on AMD CDNA 4 architecture.
At the Advancing AI event, AMD reiterated its commitment to the GPU roadmap, which includes MI325X in 2024, MI350 in the second half of 2025, and MI400 in 2026. These would potentially compete with Nvidia's upcoming Blackwell GPUs. At the Computex event, AMD had revealed plans to deliver performance and memory leadership on an annual basis for generative AI, similar to plans by rival Nvidia ( NVDA) to shorten its release cycle to an annual basis.
Su noted that data center AI accelerator market is expected to grow to $500B in 2028 from the $45B it was in 2023, a growth of 60% CAGR. She had previously forecast the market to be $400B in 2027.
AMD also invited several speakers from its partners, including tech giants Microsoft ( MSFT), Meta Platforms ( META), and Oracle ( ORCL).
Kevin Salvadore, VP of Infrastructure and Engineering at Meta, noted that the company has deployed over 1.5 million EPYC CPUs.
The race to develop generative AI products has resulted in a rising demand for the advanced chips used in AI data centers. Companies developing large language models, or LLMs, rely on advanced processors to train these models as they require high computational power, among other things.
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| To: Johnny Canuck who wrote (60352) | 10/10/2024 7:37:52 PM | | From: Johnny Canuck | | | | Teck CEO Says Canada Must Spend More to Erode China’s Critical Minerals Dominance
By Erik Hertzberg, Bloomberg News
October 10, 2024 at 3:00PM EDT
The Close
Canada opens critical minerals hub, challenging China's dominance
Mike Crabtree, president and CEO at Saskatchewan Research Council, joins BNN Bloomberg and talks about Canada opens critical minerals hub, challenging China's dominance.
(Bloomberg) -- Teck Resources Ltd.’s chief executive officer warned the Canadian government that it isn’t doing enough to foster development in the critical minerals sector.
Speaking Thursday at an event in Ottawa, Jonathan Price said that while both the US and Canada have focused on developing the electric-vehicle and battery manufacturing sectors on the continent, support for mines and mineral processing continues to lag.
That stands in contrast with countries like Saudi Arabia and China, whose governments are spending billions to entrench their positions in global supply chains, he said.
Price flagged the massive public subsidies that Canada’s federal government has pledged to international companies including Volkswagen AG, Northvolt AB and Stellantis NV, and urged further investments to support resource autonomy in the country.
“Support for car and battery plants, absent support for the mines needed to support them, is like starting a farm-to-table restaurant — without bothering to plant the farm.”
Price also referred to Canada’s “cumbersome regulatory processes,” including lengthy permitting times, saying they make the sector less competitive and are a deterrent to investment. North American governments need “ambitious, targeted government incentives and investment” to grow critical minerals capacity, he said.
The comments come as North American governments push to re-shore productive capacity and reassert control over resource supply chains amid mounting criticisms of China flooding markets with cheaper products. Both the US and Canada have started to levy tariffs on Chinese electric vehicles, as well as steel and aluminum products.
In a discussion after the speech, US Ambassador to Canada David Cohen said that both countries’ governments need to prioritize and encourage investment into the mining sector. While figuring out how to sustainably open the sector will “ultimately will be solved by the private sector,” Cohen noted North American policy should continue to offer “grants, incentives and credits to try and offset the impact and influence of China’s dominance.”
Cohen pointed to the Defense Production Act Investments program in the US, which has already provided funding to Canadian mining companies like Fortune Minerals Limited and Lomiko.
In his speech, Price noted that Canada’s government has has committed C$4 billion ($2.9 billion) in spending on critical minerals over eight years, while China has spent C$20 billion in 2023 alone, evidence that China will be aggressive in trying to consolidate its dominance in critical minerals.
“It’s about economic security, it’s about energy security, and it is about national security,” Price said.
At a news conference in Toronto, Deputy Prime Minister Chrystia Freeland said her government has put forward the first Canadian critical minerals strategy and it also has a suite of investment tax credits for green projects worth more than C$90 billion.
She said Canada is working closely with the US to coordinate supply chains, resulting in the American investments in Canadian miners. But western allies are seeing “very targeted, very intentional” Chinese action to “wipe out” nascent miners and processors, she said.
“We at the G-7, working with partners, working with all political allies in this space, really need to find collective ways to support our miners, our processors,” she said.
“I think we’ve all recognized that we need more supply chain security and I think it will take collective action to make that happen.”
--With assistance from Stephanie Hughes. |
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| To: Johnny Canuck who wrote (60353) | 10/10/2024 7:39:13 PM | | From: Johnny Canuck | | | | I am not sure I agree, but I always try to te see the other side of the conversation.
>>>>>>>>>>>>>>>>>>>>>
As long as U.S. labour markets are strong, earnings should grow: Berman
By Larry Berman
October 07, 2024 at 12:05PM EDT
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Shelly Kaushik, economist of BMO Capital Markets, joins BNN Bloomberg and talks about the U.S fed's rate path following U.S. jobs data.
The surprisingly strong U.S. employment report was a notable curve ball in understanding the U.S. economy. It was only weeks ago that we saw an employment revision that wiped out 818,000 jobs. So, what gives? The bottom line is that the U.S. Federal Open Market Committee’s (FOMC) reaction function is based on the data we see that, while subject to revision, is the data on the ground.
There is no shortage of market participants (including this one) that has an opinion on the growth and inflation outlook. I believe that the labour market, and thus consumer spending, will be stronger than expected this cycle given the increased reliance on the domestic economy versus the global economy.
But the part that is hard to reconcile is that the manufacturing economy has been in recession for close to two years, but other sectors (the consumer, read jobs) have more than made up for it.
Following the strong labour report for September, the market is ratcheting back rate cut expectations and increasing forward based earnings estimates. David Kostin, Chief U.S. Strategist at Goldman Sachs, is increasing the earnings outlook for 2025 while Goldman’s Chief Economist, Jan Hatzius, is lowering the odds of a U.S. recession to 15 per cent over the next year.
Kostin somehow thinks that 22X EPS is fair value, where we are in the 18X range (long-term is 16.5X). The Sahm rule seemingly has failed for the first time to identify a recession. Or is this all just bad data subject to massive revisions?
Geopolitics is raising global growth risks to be sure, and rising oil prices for a longer-term period could ignite the more persistent inflation concerns that seemingly disappeared with the FOMC’s 50 bps rate cut just a few weeks ago.
 As we start another U.S. earnings season this week, from a risk/return point of view, the market is a little on the expensive side relative to the past decade. The market is a better buy when cheap relative to 12-month forward earnings expectations and a better sell (or more cautionary) when it is closer to fully priced.
This chart shows analyst bottom up forward 12-month consensus (blue line) EPS consensus versus the S&P 500 (red line) and measures the deviation with a 10-year Z-Score (lower chart). Generally, when the market is 1-2+ standard deviations cheap to forward based price targets we want to be a better buyer, and when 1-2 standard deviations expensive a better seller.
Currently, with price targets likely to rise in the coming weeks given the recent data, the market is closer to neutral, and could rise still.
 When we factor in what a fair multiple is on EPS using a discount factor based on longer-term yields, we see where the risks lie. It’s not on the earnings side, it’s likely on what we should pay for them.
Goldman Sachs says the current multiple is fair value. While we do not agree, we do believe that as long as we remain at full employment, stocks can hold the multiple. But if bond yields continue to rise, that fair value multiple is much closer to 19X than the 22.5 forward multiple we are at today.
It’s about a 15 per cent valuation gap when the labour market breaks, but that may not be anytime soon. The earnings yield (earnings/price) of the market is the inverse of the P/E. |
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| To: Johnny Canuck who wrote (60355) | 10/11/2024 1:01:34 AM | | From: Johnny Canuck | | | | Skip Navigation
Finance
The Fed is finally cutting rates, but banks aren’t in the clear just yet
Published Thu, Oct 10 202412:51 PM EDTUpdated 4 hours ago
Hugh Son @hugh_son
WATCH LIVE
Key Points
- Falling interest rates are usually good news for banks, especially when the cuts aren’t a harbinger of recession.
- But the ride probably won’t be a smooth one: Persistent concerns over inflation could mean the Fed doesn’t cut rates as much as expected and Wall Street’s projections for improvements in net interest income may need to be dialed back.
- While all banks are expected to ultimately benefit from the Fed’s easing cycle, the timing and magnitude of that shift is unknown, based on both the rate environment and the interplay between how sensitive a bank’s assets and liabilities are to falling rates.
In this article
Federal Reserve Board Chairman Jerome Powell holds a press conference following a two-day meeting of the Federal Open Market Committee on interest rate policy in Washington, U.S., September 18, 2024. REUTERS/Tom Brenner
Tom Brenner | Reuters
Falling interest rates are usually good news for banks, especially when the cuts aren’t a harbinger of recession.
That’s because lower rates will slow the migration of money that’s happened over the past two years as customers shifted cash out of checking accounts and into higher-yielding options like CDs and money market funds.
When the Federal Reserve cut its benchmark rate by half a percentage point last month, it signaled a turning point in its stewardship of the economy and telegraphed its intention to reduce rates by another 2 full percentage points, according to the Fed’s projections, boosting prospects for banks.
But the ride probably won’t be a smooth one: Persistent concerns over inflation could mean the Fed doesn’t cut rates as much as expected and Wall Street’s projections for improvements in net interest income — the difference in what a bank earns by lending money or investing in securities and what it pays depositors — may need to be dialed back.
“The market is bouncing around based on the fact that inflation seems to be reaccelerating, and you wonder if we will see the Fed pause,” said Chris Marinac, research director at Janney Montgomery Scott, in an interview. “That’s my struggle.”
So when JPMorgan Chase
kicks off bank earnings on Friday, analysts will be seeking any guidance that managers can give on net interest income in the fourth quarter and beyond. The bank is expected to report $4.01 per share in earnings, a 7.4% drop from the year-earlier period.
Known unknowns
While all banks are expected to ultimately benefit from the Fed’s easing cycle, the timing and magnitude of that shift is unknown, based on both the rate environment and the interplay between how sensitive a bank’s assets and liabilities are to falling rates.
Ideally, banks will enjoy a period where funding costs fall faster than the yields on income-generating assets, boosting their net interest margins.
But for some banks, their assets will actually reprice down faster than their deposits in the early innings of the easing cycle, which means their margins will take a hit in the coming quarters, analysts say.
For large banks, NII will fall by 4% on average in the third quarter because of tepid loan growth and a lag in deposit repricing, Goldman Sachs banking analysts led by Richard Ramsden said in an Oct. 1 note. Deposit costs for large banks will still rise into the fourth quarter, the note said.
Last month, JPMorgan alarmed investors when its president said that expectations for NII next year were too high, without giving further details. It’s a warning that other banks may be forced to give, according to analysts.
“Clearly, as rates go lower, you have less pressure on repricing of deposits,” JPMorgan President Daniel Pinto told investors. “But as you know, we are quite asset sensitive.”
There are offsets, however. Lower rates are expected to help the Wall Street operations of big banks because they tend to see greater deal volumes when rates are falling. Morgan Stanley analysts recommend owning Goldman Sachs
, Bank of America and Citigroup
for that reason, according to a Sept. 30 research note.
Regional optimism
Regional banks, which bore the brunt of the pressure from higher funding costs when rates were climbing, are seen as bigger beneficiaries of falling rates, at least initially.
That’s why Morgan Stanley
analysts upgraded their ratings on US Bank and Zions
last month, while cutting their recommendation on JPMorgan to neutral from overweight.
Bank of America and Wells Fargo have been dialing back expectations for NII throughout this year, according to Portales Partners analyst Charles Peabody. That, in conjunction with the risk of higher-than-expected loan losses next year, could make for a disappointing 2025, he said.
“I’ve been questioning the pace of the ramp up in NII that people have built into their models,” Peabody said. “These are dynamics that are difficult to predict, even if you are the management team.”
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