NEW YORK (Reuters) – The uncertain trajectory of interest rates is making it difficult for U.S. banks to forecast profits and prompting some to adopt a cautious stance for the rest of the year.
Banks have reaped high profits in recent quarters as the Federal Reserve began raising interest rates in March 2022 to tame inflation, which increased net interest income (NII), or the difference between what lenders they earn on loans and pay for deposits.
But that positive effect has been waning, and the outlook for rates is now uncertain, particularly after March inflation data came in higher than expected, pushing off Wall Street’s forecast for when the Fed will start cutting rates.
“It’s certainly difficult these days to predict NII, given all the volatility that we’ve seen across many different data points, as well as some of the uncertainty that’s out there related to how our customers will behave,” Lo said Wells Fargo finance chief, Michael Santomassimo.
Wells Fargo’s NII fell 8% in the first quarter, hurt by rising interest rates on borrowing costs, including the impact of customers switching to higher-yielding deposit products, as well as shrinking balances of loans. The bank reiterated on Friday that its NII could fall to 7% to 9% this year.
“People know that interest rates are uncertain, but rate changes have a faster effect on banks than other sectors,” said JJ Kinahan, CEO of brokerage IG North America.
JPMorgan Chase (NYSE:) highlighted similar challenges in dealing with the changing rate environment. Chief Financial Officer Jeremy Barnum said on a call with analysts following earnings that while his current guidance was not significantly different from the fourth quarter, it was based on “the current yield curve, which is now a little stale “.
JPM reported that NII rose 11%, but expects full-year income from interest payments to be lower than analysts’ expectations. JPM executives have warned for months that its NII increase was not sustainable.
“You have to be prepared for a range of outcomes, and we are,” Jamie Dimon said on the analyst call. “All these questions about interest rates and yield curves… We don’t want to guess the outcome. I’ve never seen anyone positively predict a major inflection point in the economy, literally in my lifetime or in history.”
Teddy Oakes, investment analyst at T. Rowe Price, said there is little benefit for banks to “get in the game early in the year” and be too optimistic about NII, as higher expectations were already been discounted.
At Citigroup, net interest margin increased 1% year over year. The bank expects NII excluding markets to decline modestly, as growth would come from non-interest-bearing income. Citi CFO Mark Mason said on a conference call that the smaller rate cuts expected this year do not “have a material impact” on the bank’s guidance.
“Despite a favorable environment of higher rates for a longer period, early indications are that banks will mostly maintain their relatively pessimistic guidance on net interest income for 2024,” said Mark Narron, senior director at Fitch Ratings.
Banks were generally positive on the economy, with Dimon saying the economy remained strong with people having excess money to spend.
“There’s no question that the Fed’s policy of very high short-term rates impacts banks,” said Rick Meckler, partner at Cherry Lane Investments. “The surprise has always been that the economy hasn’t slowed down, and much of the bank earnings are tied to economic conditions.”