With the U.S. Federal Reserve Board expected to cut interest rates tomorrow, Moody’s Ratings said lower short-term rates would be negative for banks’ net interest income and earnings, but positive for asset quality.
In a new report, the rating agency said it expects the Fed to start cutting rates on Sept. 17, “as concerns surrounding rapidly weakening labor market conditions outweigh tariff-related inflation risks.”
Moody’s is forecasting 50 to 75 basis points of rate cuts by the end of the year.
Lower rates would lead to loan repricing that weighs on banks’ largest revenue source, net interest income — as borrowing costs typically decline more quickly than the rates banks pay on deposits, the report said.
“Deposit cost reductions should eventually catch up and support [net interest income]. However, recent deposit growth among rated U.S. banks has been modest, and competition has limited banks’ ability to reprice deposits downward, adding to the profitability challenge,” it said.
At the same time, lower rates will reduce household debt costs, which should bolster banks’ asset quality, it noted.
“In particular, rate cuts will improve debt affordability for floating-rate retail and commercial borrowers,” it said. “And if lower interest rates aid U.S. economic growth, that would also support banks’ solid asset quality.”