US bank stocks experienced a significant surge on Thursday, following the Federal Reserve's announcement of a jumbo rate cut. This development has left investors feeling bullish, as they anticipate that the easing of monetary policy will benefit both Wall Street giants and smaller regional lenders.

Goldman Sachs (GS), Capital One (COF), and Citigroup (C) all witnessed increases of over 3% on Thursday morning, accompanied by modest gains for Wells Fargo (WFC), Bank of America (BAC), JPMorgan Chase (JPM), and Morgan Stanley (MS). Additionally, indexes tracking large (KRE) and mid-sized (KRX) regional banks also experienced upward momentum, rising by approximately 2%.

Many banks and investors are hoping for a repeat of the prosperous conditions witnessed in 1995. During that time, a gentle landing for the US economy, combined with the onset of a rate-cutting cycle, sparked one of the most prosperous periods for banks in US history. However, it is important to note that the current landscape for banks may be more complex, with numerous uncertainties still prevailing.

The impact of lower rates on banks will be reflected in their net interest income, a critical revenue metric that represents the lending margin after deducting deposit costs. Moody's Ratings, in a recent note, stated that the rate cuts will initially exert a "credit negative" effect on most banks due to an expected tightening of net interest income.

Analysts at Moody's Ratings explained, "We anticipate that deposit costs will adjust more slowly than loan yields, thereby limiting net interest income, which is a major revenue source for most banks."

Last week, JPMorgan COO Daniel Pinto caused some concern among investors, stating that the consensus view of the bank earning $94 billion in 2025 was "a bit too optimistic," partly due to the influence of falling rates. Nevertheless, Moody's maintains a more favorable long-term outlook, suggesting that decreases in deposit costs will eventually catch up and bolster net interest income. Furthermore, if lower rates prolong economic growth, it will aid banks in maintaining and improving their asset quality.

RBC Capital Markets analyst Gerard Cassidy predicts that big banks will allocate higher provisions for potential loan losses over the next year, but also anticipates "better earnings" in 2025.

The immediate relief from the rate cut may primarily benefit regional banks with higher exposure to commercial real estate. The industry has been weakened by the Federal Reserve's aggressive rate-tightening campaign and the subsequent rise in center-city property vacancies caused by the Covid-19 pandemic.

Over time, the lower federal funds rate is expected to stimulate demand from commercial borrowers, as these cuts alleviate uncertainty over the economy and borrowing costs. In a note on Thursday, JPMorgan analyst Steven Alexopoulos, who covers mid and small cap banks, stated, "We believe that the sector is poised for re-valuation."

As the implications of the jumbo rate cut unfold, investors and market experts will closely monitor the reactions of banks and anticipate the long-term effects on their profitability and asset quality.