U.S. bank executives struck a cautious tone on Monday as they updated investors on how lower interest rates and an inverted yield curve would affect the year’s profits.
Speaking at an industry conference, top brass from Citigroup Inc and Wells Fargo and Co tempered their outlooks for net interest income, a measure of how much money a lender earns from charging interest, citing macroeconomic concerns. It was the banks’ first guidance since the U.S. Federal Reserve cut interest rates in July for the first time in over a decade.
Wells Fargo relies heavily on interest rates to boost revenue, since it manages rate-sensitive deposits and mortgage securities.
More than half of Wells Fargo’s loan portfolio carries variable interest rates, with the majority linked to industry benchmarks which have largely fallen in recent months.
On July 31, the U.S. central bank cut its key overnight lending rate to a target range of 2.00 per cent to 2.25 per cent due to concerns about the global economy on the back of the U.S.-China trade war and muted U.S. inflation. The Fed is widely expected to cut rates again later this month.
Wells Fargo Chief Financial Officer John Shrewsberry said the San Francisco-based lender now expects net interest income to fall 6 per cent in 2019, lowering projections for the second time this year. Previously, the bank forecast a decline of up to 5 per cent.
Analysts on average were expecting the bank to post a drop of 3.8 per cent in 2019.
Citi, the most global of the U.S. banks, has been less asset sensitive than its peers. But Chief Financial Officer Mark Mason said on Monday that the shrinking difference between long- and short-term borrowing rates and the potential for accelerated rate cuts has made the bank slightly more conservative in its outlook.
The bank now expects net interest income to be up between 3 per cent and 4 per cent for the year, compared with prior guidance of 4 per cent growth. Shares of Wells Fargo finished 2.7 per cent lower, while Citi shares declined 4.3 per cent.
Bank of America Corp also presented on Monday but did not comment on net interest income expectations. Goldman Sachs Group Inc and Morgan Stanley are scheduled to present later in the week.