Shares of several banking stocks rebounded Wednesday after U.S. Federal Reserve officials signaled an end to the central bank’s rate hikes. When all was said and done on Wednesday, SoFi Technologies (NASDAQ:SOFI) was up 12.5%, Bank of America (NYSE:BAC) had increased by 4.2%, and Fifth Third Bancorp (NASDAQ: FITB) closed up 6% for the session. Several other major banking stocks followed suit with more conservative pops amid a broader market rally; both S&P500 And Nasdaq Composite indices jumped more than 1.3% on Wednesday.
At the U.S. Federal Reserve’s final meeting in 2023, Fed officials opted to leave the central bank’s benchmark interest rate unchanged in a target range between 5.25% and 5.5%. This is the third consecutive monthly decision in which rates remain unchanged – albeit after an unprecedented cycle of 11 rate hikes since the Fed began raising rates in March 2022.
Additionally, policymakers at the Federal Open Market Committee signaled Wednesday that there would be at least three rate cuts in 2024, likely in quarter-percentage-point increments.
Why falling rates are a mixed bag for bank stocks
So why banking stocks rally in response? After all, higher interest rate are widely seen as a positive catalyst for banks. The country’s top banks can generally increase their profits by taking advantage of wider spreads between the interest paid to customers and the money they can earn from investing those customers’ funds.
At the same time, with the federal funds rate now hovering at its highest level in more than 22 years, the Federal Reserve’s decision to raise interest rates at an unprecedented pace was intended to dampen inflation galloping, which has dampened consumer spending, borrowing activity and broader economic growth. While banks can undoubtedly benefit from higher rates to some extent, investors are right to be excited about the prospect of spurring greater economic activity as the rate hike cycle begins to take hold. reverse.
Not all banks will win if rates fall
Wednesday’s broader market rally undoubtedly helped fuel gains in several struggling bank stocks. But make no mistake: not all banks are equal. This could be one of the main reasons why SoFi Technologies, in particular, is currently enjoying outsized gains.
In fact, I Distinguished SoFi in July given its cutting-edge technological underpinnings and notable lack of physical branches. SoFi is a vertically integrated digital company fintech stocks which not only obtained a national banking charter in early 2022, but also recently launched the banking-as-a-service platform Cyberbank Digital in late 2022.
Through its digital and mobile-centric approach, SoFi has successfully attracted hundreds of thousands of new customers and several billion dollars in new deposits in each of the last quarters; SoFi added 717,000 new members last quarter alone, bringing its total to more than 6.9 million, while deposits with SoFi Bank increased by $2.9 billion, up sequentially by 23% between the second and third quarters to reach $15.7 billion. This growing deposit base provides SoFi with a lower-cost source of funding for its fast-growing lending business, while simultaneously allowing it to maximize its net interest margin by keeping loans on the balance sheet longer than it normally does. could before receiving its banking charter.
At the same time, Bank of America’s deposit base remained relatively stable over the last quarter, although it was much larger, at around $1.88 trillion. Fifth Third Bank’s deposits increased by a modest 2% sequentially in the third quarter, to $165.6 billion.
But SoFi’s true strength could become even more evident as the Fed begins to cut rates in 2024. During an earnings conference call earlier this year, SoFi CEO Anthony Noto claimed that as rates inevitably begin to fall, his company should “be able to maintain rates.” much longer and higher than our competitors and actually gain even more market share. »
The Federal Reserve’s latest move to keep rates steady while signaling multiple rate cuts in 2024 is undoubtedly positive for bank stocks right now. But rather than spreading my investments across multiple bank stocks, I’m personally content to focus my capital on emerging bank stocks like SoFi, which are poised for relative outperformance as the new rate cycle of the Fed moves in.
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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Steve Symington has positions in SoFi Technologies and has the following options: Long January 2024 $15 calls on SoFi Technologies. The Motley Fool holds positions with and recommends Bank of America. The Motley Fool has a disclosure policy.
Why shares of SoFi Technologies, Bank of America and Fifth Third Bancorp rallied on Wednesday was originally published by The Motley Fool
