By Sinéad Carew
(Reuters) - Shares in U.S. banks were rallying strongly on Thursday after the Federal Reserve signaled potential interest rate cuts in 2024 with the sector returning to its highest level since early March just before a crisis that put some banks out of business.
Wells Fargo and BofA Global Research analysts raised price targets across the banking sector in wake of the Fed's dovish pivot on Wednesday
The S&P 500 bank index, up 4.4% and climbing sharply for a second session in a row, hit its highest level since March 6. This as the KBW Regional Banking index was also rising more than 4%.
The Fed left interest rates unchanged after its meeting on Wednesday and its Chair Jerome Powell said the central bank's monetary policy tightening was likely over with inflation falling faster than expected and that talk of rate cuts was coming into view."
While higher interest rates boost lenders' profits to an extent they can also result in weakening of loan demand and pressure for banks to raise deposit rates they pay customers.
In March three medium-sized banks collapsed under pressure from rising interest rates and as customers moved their deposits to seek stability as well as higher returns.
On Thursday some of the biggest percentage gainers in the S&P 500 bank index were regional banks Zions Bancorp up 10.0%, Regions Financial (NYSE:RF) up 9.0% and Citizens Financial (NYSE:CFG), adding 8.8%.
Bigger banks were rising also but at a slower pace with JPMorgan Chase (NYSE:JPM) up 2.1%, Citigroup up 3.8%, and Wells Fargo adding 5.1%.
BofA Global Research analyst Ebrahim Poonawala said in a research note issued early on Thursday that the KBW Bank index was still trading at a 50% discount to the S&P 500 even after outperforming the benchmark since its October lows. The KBW index was last up 5.4% on the day.
While investors had already been revisiting their exposure to banks in recent weeks, according to Poonawala, the move in interest rates "on the back of Fed messaging has the potential to drive further FOMO (fear of missing out)."
Rick Meckler, partner at Cherry Lane Investments, a family investment office in New Vernon, New Jersey, pointed to the potential economic boost from rate cuts with a strong economy as "a key to bank profitability."
Rallying stock and bond markets will also boost large banks segments including wealth management, capital markets and credit according to Meckler, who also noted that banks are among underperforming sectors "playing catch-up" in the market.