⌛ Did you miss ProPicks’ 13% gains in May? Subscribe now & catch June’s top AI-picked stocks early.Unlock Stocks

US banks' profit picture less clear with cloudy rates trajectory

Published 04/12/2024, 01:55 PM
Updated 04/12/2024, 06:06 PM
© Reuters. FILE PHOTO: A customer walks out of a branch of the JPMorgan Chase & Co bank in New York, March 15, 2013. REUTERS/Lucas Jackson/File Photo
C
-
JPM
-
WFC
-

NEW YORK (Reuters) - The uncertain trajectory of interest rates is making it hard for U.S. banks to forecast profits and leading some to adopt a cautious stance for the remainder of the year.

Banks have reaped high profits in recent quarters as the Federal Reserve started raising interest rates in March 2022 to tame inflation, which boosted net interest income (NII), or the difference between what lenders earn on loans and pay out 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 out Wall Street's forecasts for when the Fed starts rate cuts.

"It's certainly challenging these days to forecast NII, given all of the volatility that we've seen across a lot of the different data points, as well as some of the uncertainty that's out there relative to how our clients are going to behave," Wells Fargo's finance chief Michael Santomassimo said.

Wells Fargo's NII fell 8% in the first quarter, hurt by higher interest rates on funding costs, including the impact of customers moving to higher yielding deposit products, as well as lower loan balances. The bank reiterated on Friday that its NII could fall 7% to 9% this year.

"People know 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:JPM) pointed to similar challenges in navigating the changing rates environment. Chief Financial Officer Jeremy Barnum said on an analyst call following earnings that while its current guidance was not meaningfully different from what it was in the fourth quarter, it was based on the "current yield curve, which is a little bit stale now."

JPM reported that NII rose 11% but it forecast that full-year income from interest payments would be below analysts' expectations. JPM's executives have warned for months that its surging NII was not sustainable.

"You've got to be prepared for a range of outcomes, which we are," said Jamie Dimon on the analyst call. "All of these questions about interest rates and yield curves... We don't want to guess the outcome. I've never seen anyone actually positively predict a big inflection point in the economy literally in my life or in history."

Teddy Oakes, investment analyst at T. Rowe Price said there was little benefit to banks of "sticking your neck out early in the year" and being too optimistic on NII, as higher expectations had already been priced in.

At Citigroup, net interest income increased 1% year-on-year. The bank forecast that NII excluding markets would be down modestly, as growth would be from noninterest-bearing revenue. Citi CFO Mark Mason said on a conference call that the fewer rate cuts expected this year don't "have a material impact" on the bank's guidance.

"Notwithstanding a supportive higher-for-longer rate environment, early indications are that banks will mostly maintain their relatively downbeat 2024 net interest income guidance," said Mark Narron, senior director at Fitch Ratings.

© Reuters. FILE PHOTO: A customer walks out of a branch of the JPMorgan Chase & Co bank in New York, March 15, 2013. REUTERS/Lucas Jackson/File Photo

Banks were generally positive on the economy, with Dimon saying the economy remained strong with people having excess money to spend.

"There’s no doubt the Fed’s policy of very high short term rates impacts banks," said Rick Meckler, partner, Cherry Lane Investments. "The surprise has always been that the economy hasn’t slowed, and so much of bank earnings are tied to economic conditions.”

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.