Shares of several bank stocks rallied on 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 (SOFI 0.31%) was up 12.5%, Bank of America (BAC 0.32%) had risen 4.2%, and Fifth Third Bancorp (FITB 1.83%) closed up 6% for the session. Several other major bank stocks followed suit with more conservative pops amid a broader market rally; both the S&P 500 and Nasdaq Composite indexes jumped more than 1.3% on Wednesday.
In the U.S. Federal Reserve's final meeting of 2023, Fed officials opted to leave the central bank's benchmark interest rate flat at a targeted range of between 5.25% and 5.5%. This was the third straight monthly decision in which rates were left unchanged -- albeit following an unprecedented cycle of 11 rate hikes since the Fed began raising rates in March 2022.
What's more, policymakers on the Federal Open Market Committee signaled on Wednesday there will be at least three rate cuts in 2024, likely in quarter-percentage-point increments.
NASDAQ: SOFI
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Why lower rates are a mixed bag for bank stocks
So why, then, are bank stocks rallying in response? After all, higher interest rates are widely viewed as a positive catalyst for banks. The country's leading banks can generally increase profits by taking advantage of greater spreads between the interest paid to customers and the money they can make by investing those customers' funds.
At the same time, with the fed funds rate now hovering at its highest level in over 22 years, the Federal Reserve's decision to increase interest rates at an unprecedented pace was aimed at easing runaway inflation, which has dampened consumer spending, borrowing activity, and broader economic growth. While banks can undoubtedly leverage higher rates to some extent, investors are right to celebrate the prospect of spurring greater economic activity as the rate-hike cycle begins to reverse course.
Not every bank will win as rates come down
Wednesday's broader market rally undoubtedly helped fuel gains for several beaten-down bank stocks. But make no mistake: Not all banks are created equal. That could be a big reason SoFi Technologies, in particular, is enjoying outsize gains right now.
Indeed, I singled out SoFi back in July given its cutting-edge technological foundations and notable lack of physical branches. SoFi is a vertically integrated, digital-first fintech stock that not only obtained a national bank charter in early 2022, but also recently launched banking-as-a-service platform Cyberbank Digital in late 2022.
Given its digital-first, mobile-centric approach, SoFi has been able to attract hundreds of thousands of new customers and multiple billions of dollars in new deposits for each of the past several quarters; SoFi added 717,000 new members last quarter alone, bringing its total to over 6.9 million, while deposits at SoFi Bank grew by $2.9 billion, up 23% sequentially between the second and third quarters to $15.7 billion. This swelling deposit base provides SoFi with a lower-cost funding source for its fast-growing loan business, while simultaneously allowing it to maximize net interest margin by holding loans on the balance sheet longer than it could before receiving its bank charter.
Meanwhile, Bank of America's deposit base remained relatively flat sequentially last quarter, albeit at a much larger base of roughly $1.88 trillion. Fifth Third Bank's deposits rose a modest 2% sequentially in Q3, to $165.6 billion.
But SoFi's true strength could become even more evident as the Fed begins to reduce rates in 2024. During an earnings conference call earlier this year, SoFi CEO Anthony Noto asserted that as rates inevitably begin to decline, his company should "be able to hold rates much longer and higher than our competitors and really gain even more market share."
The Federal Reserve's latest move to hold rates steady while signaling multiple rate reductions in 2024 is undoubtedly a net positive for bank stocks right now. But rather than spreading my investments across multiple banks' shares, I'm personally content concentrating my capital on up-and-coming bank stocks like SoFi that are poised to enjoy relative outperformance as the Fed's new rate cycle takes hold.
