Wells Fargo & Co. forecast a 6% decline year over year in net interest income for 2019 if current market expectations for interest rates hold.
The bank had projected a decline of almost 5% in July when it reported second quarter earnings. In a presentation Sept. 9, CFO John Shrewsberry noted that the "pace of change in interest rates has accelerated," including a sharp drop in the yield on 10-year Treasurys, since the second quarter report. The new guidance translates to an expected decline of $1.8 billion, or 7%, in net interest income in the second half of the year compared with the first half.
Shrewsberry said about half of Wells Fargo's loans are variable rate, and about 80% of the variable-rate loans are tied to the London interbank offered rate.
On the funding side, Shrewsberry said the company is seeing "encouraging actions across the industry" as banks shorten promotional periods for deposit rate offers and lower promotional rates.
"However, we don't believe we hit the inflection point yet since deposit campaigns have continued and retail rates have remained stable," he said.
To fight against margin compression, Shrewsberry said Wells Fargo will have to be cautious with deposit pricing and evaluate whether lengthening the duration of its assets makes sense to defend against the prospect that a deep economic downturn drives further declines in rates or keeps them low for a long time.
For now, though, he said, "If the curve is going to be flat as it is, we'd like to have the opportunity to not lock into big duration that we might subsequently regret."
Shrewsberry declined to provide an update about Wells Fargo's ongoing search for a permanent CEO, in keeping with the company's practice since Timothy Sloan stepped down from the post in March. He also declined to project when the company might be released from its asset cap, a condition of a 2018 consent order with the Federal Reserve. But he said the bank is emerging from the fines, penalties and settlements that have created "excess operating losses" over the past few years.
"We're not creating new issues," he said. Considering "the lifespan of a legal settlement" and other factors, those sorts of expenses are probably "out of the run rate, maybe a year from now."
