Lower interest rates are typically good news for banks, especially when rate cuts are not a harbinger of economic recession. This is because lower rates will slow the flow of cash that customers have been moving out of checking accounts into higher-yielding options like CDs and money market funds over the past two years.

According to the Federal Reserve's forecast, the Fed's reduction of the benchmark interest rate by 0.5 percentage points last month marked a turning point in its economic management and conveyed its intention to lower rates by a full two percentage points more, boosting the outlook for banks.

However, this process may not be smooth sailing: ongoing concerns about inflation could mean that the Fed does not cut rates as significantly as expected, and Wall Street's expectations for net interest income (NII) improvements may need to be lowered.

Chris Marinac, head of research at Janney Montgomery Scott, said in an interview, "With the fact that inflation seems to be accelerating again and the market is rebounding, you wonder if the Fed will pause its rate hikes."

Therefore, when JPMorgan Chase reports bank earnings on Friday, analysts will be looking for any guidance from management on net interest income for the fourth quarter and beyond. The bank is expected to report earnings per share of $4.01, a 7.4% decrease from the same period last year.

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Not out of the woods yet

Although all banks are expected to eventually benefit from the Fed's easing cycle, the timing and magnitude of this shift are unclear, depending on the interplay between the interest rate environment and the sensitivity of banks' assets and liabilities to rate declines.

Ideally, banks would enjoy a period where the decline in funding costs outpaces the yield on revenue-generating assets, thereby increasing their net interest margins.

However, analysts say that for some banks, the repricing of their assets could actually be faster than deposits in the early stages of the easing cycle, meaning their profit margins will be hit in the next few quarters.

A report by Goldman Sachs analysts, led by Richard Ramsden, on October 1st, stated that due to tepid loan growth and lagging deposit repricing, net income for large banks will decline by an average of 4% in the third quarter. The report said that deposit costs for large banks will continue to rise in the fourth quarter.Last month, the CEO of JPMorgan Chase surprised investors by stating that expectations for next year's NII were too high, without providing further details. Analysts say other banks may also be forced to issue such warnings.

JPMorgan Chase CEO Daniel Pinto told investors, "Obviously, with interest rates coming down, the pressure to reprice deposits will be less." "But you know, we are quite sensitive to assets."

However, there are also offsets. Lower interest rates are expected to help the Wall Street operations of large banks, as they tend to see greater trading volumes when interest rates decline. As a result, Morgan Stanley analysts recommended holding shares of Goldman Sachs, Bank of America, and Citigroup in a research report dated September 30.

Regional banks, which bore the brunt of rising financing costs when interest rates climbed, are seen as greater beneficiaries of interest rate declines, at least initially.

This is why Morgan Stanley analysts upgraded their ratings for US Bank and Zions Bank last month, while downgrading JPMorgan Chase from a buy to a neutral rating.

Portales Partners analyst Charles Peabody said that Bank of America and Wells Fargo have been lowering their expectations for NII this year. He said that, coupled with the risk of higher-than-expected loan losses next year, 2025 could be disappointing.

Peabody said, "I've been questioning the pace at which people are embedding NII increases in their models." "These dynamics are hard to predict, even if you are the management team."