(03-06-2020, 11:59 AM)vbin Wrote:(03-06-2020, 11:54 AM)fenders53 Wrote:I do get what you are saying but I need more than this, lol. I am learning that if interest to go zero. Banks would get crazy cheap. I dont know exactly why?(03-06-2020, 10:58 AM)vbin Wrote: Questions for folks here. If there is a interest rate cut, seems like bank will be impacted negatively. Can anyone enlighten how and why? If this continues we might see 0 interest or close to it and as per one theory banks will suffer..
I'm no expert but interest rates spread matter. You are 75yrs old with a couple hundred K in cash. I am US Bank. I've been paying you 1% on your savings and 2 1/2% for a CD for years. I need to loan your money out at a higher rate and make a profit. I'm competing with GM and Ford that are giving away car loans at 1.9% to sell product because sales are slowing. How am I going to pay you that CD rate? I can't so I drop it to 1.5% and you go buy an overpriced utility stock your financial avisor recommended that barely pays 2.5% because Utes already ran, but it's better than your banks offer. So now you are 55yrs old and I am Prudential. I would like to sell you an annuity. I'll give you 1% return because I have to pay .5% to get the money. You aren't impressed at all because it used to be 3% not long ago, and I'm not making the profits I did a year ago. I have to find another way to meet my profit forecasts. You will look elsewhere to get some real yield.
P.S. I'm long all stocks mentioned and that is why they are under performing the market. That was a ridiculously low level explanation but you get the point. There is value at some SP, but they aren't worth what they were last month. There is a legitimate reason for the SP discount. Interest rates aren't going higher anytime soon. They are much more likely to go lower and it feeds the fear. The fear is legitimate.
Didn't mean to offend your intelligence. Expand your studying WAY past an in internet chat forum lol. Didn't mean to waste your time. It really is all about the rate spread, and customers chasing elusive yield. Banks have to loan money at a profit and at extreme low rates the competition gets extremely tough. It really is about that i the end. They borrow and loan money at a higher rates. EPS suffers when the spread contracts. They hope you remain a customer and and sell you other services, but they have to keep you as a customer and the competition is fierce to keep you from shopping. Put in some reading, or youtube time and somebody far much more intelligent than I will teach you more effectively than a paragraph ever could. This is Banking 101.