- Our house view remains unchanged;we expect two US Fed Fund rate cutsof 25 bps each time in 2H25
- US banks may face some NIM pressure, but non-NII, especiallyinvestment banking businesses, should see higher growth potential ina lower rate environment
- Given that the funding cost is still far from zero, the deposit franchise is thekey differentiating factor for US commercial banks
- We prefer investment banks tocommercial banks, driven by better fee-based income
Our view on US rate cuts remains unchanged. In Feb 2025, both headline and core CPI came in at 0.2% m/m (consensus: 0.3% for both), a tad slower than 0.5% in Jan 2025 for both. Headline and core inflation eased from 3.0% and 3.3% in same period last year to 2.8% and 3.1% respectively. Meanwhile, further disinflation could be stalled by the effect of trade tariffs. Frontloading consumption has kept prices of tariff-related goods such as used cars and apparels intact, while prices could see another leg up when the tariffs kick in from April. Also, consumer sentiments appear to be in good shape owing to a strong job market, which has resulted in strong wage growth. Our house view remains unchanged, we expect two US Fed Fund rate cuts of 25 bps each time in 2H25.
Expect US banks to deliver solid earnings growth for FY25F. Consensus expects most major US banks to deliver high single-digit to double-digit y/y earnings growth in FY25F, except Wells Fargo at c.2% and y/y earnings decline for JP Morgan. Overall, NIM may face downward pressure, but we expect non-NII such as investment banking and fee-based businesses to deliver positive growth in 2025 given a favourable interest rate environment and a potential increase in M&A and IPO opportunities. As such, credit costs are expected to normalise and stay manageable. The key differentiating factor for US commercial banks is the deposit structure when US rates are still far from near zero, while industry players capable of securing low-cost deposits face less NIM pressure. During the FY24 results briefing, all major US commercial banks stated that they are actively adjusting their deposit strategies, with a focus on retaining low-cost deposits and reducing exposure to high-rate funding. JP Morgan and Bank of America expect NII growth to rebound in 2H25, while Wells Fargo and Citigroup project only modest increases.
Investment banks are in better position than commercial banks. Overall, we remain positive on share price performance for US banks, though the performance may not be as strong as 2024 due to expectations of steady-to-lower short-term interest rates, economic growth around 2-2.5%, and a "softer regulatory touch" under the Trump administration. Our top pick in the US banking sector will be investment banks that benefit more from rate cuts. Lower rates tend to drive higher deal transactions, investment banking fees, and trading volume. Commercial banks, on the other hand, are seeing higher pressure on growth prospects in the current rate environment.
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