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Hostile interest rate picture sets off flurry of cuts to bank revenue forecasts

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Hostile interest rate picture sets off flurry of cuts to bank revenue forecasts

A punishing shift in interest rates has touched off a wave of downward revisions to revenue guidance just two months after banks set projections in second quarter earnings reports.

Yields fell across the maturity spectrum, led by a drop of 55 basis points in 10-year Treasurys from the end of July to a low in late August. The moves deepened an ominous inversion in the curve.

"There are businesses where it just sucks into your margin, and there's very little you can do about it," JPMorgan Chase & Co. CEO Jamie Dimon said at a conference, summing up the environment for much of the industry.

Yields did recover partially in early September, moderating the pressure, and some banks said that hedging strategies were holding and protecting net interest margins. Some banks also reported relief on deposit costs. The damage was widespread, however.

Across a group of 26 banks with more than $50 billion in assets, the shift in rates and midquarter updates from banks fed into reductions in consensus analyst forecasts for 2020 net interest margins nearly across the board. From the end of July to the middle of September, the mean analyst estimate for Wells Fargo & Co.'s 2020 NIM dropped 5 basis points to 2.63%, according to data from Capital IQ. In early September, Wells Fargo projected that its 2019 net interest income would decline 6% year over year, worse than the guidance for a decline of almost 5% that it gave in July.

For Comerica Inc., the mean analyst estimate for 2020 NIM fell 9 basis points to 3.38%.

Overall, analysts project that NIMs for the group will drop a median 5 basis points in 2019 from 2018, and a further median drop of 9 basis points in 2020 from 2019, according to data from S&P Global Market Intelligence.

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Analysts also project a sharp slowdown in growth in net interest income, where higher loan balances can offset contracting margins. For the group, consensus analyst estimates forecast that median year-over-year growth in net interest income will decelerate to 1% in 2020 from 2.6% in 2019.

Analysts expect a 4.9% decline in 2020 net interest income at Comerica after a 0.7% increase in 2019. In early September, the bank projected that interest rates implied by the forward curve would cut its net interest income for the third quarter by $30 million.

"Comerica is an asset sensitive bank and so rates moving up or down is really impactful to us," former CFO Muneera Carr said at an investor presentation on Sept. 10, according to a transcript. The company is also being hurt by rising deposit costs despite declines in benchmark rates, as it seeks to win balances by lagging competitors in changing the yields it offers.

"We continue to carefully manage our deposit rates to attract and retain relationships, and in conjunction with our funding needs," CEO Curtis Farmer said at the conference.

In its mid-quarter update, Regions Financial Corp. said that the drop in rates along the long end of the curve transformed a tailwind of higher-yielding loan originations into a modest headwind, and the bank softened its revenue growth outlook slightly.

Still, the company stuck to its forecast that its NIM would bottom out at about 3.40% in the fourth quarter, with a hedging strategy it launched about two years ago coming into full force next year.

"Once we start 2020, we're relatively neutral to changes in the short rate," M. Deron Smithy, the bank's treasurer, said at a conference. Until then, Regions is relying on falling deposit costs, which it said peaked in May, to keep its margin "relatively stable," Smithy said.

Huntington Bancshares Inc. also said in September that the ability to cut deposit prices is a key factor behind its expectation that its NIM will start to recover after hitting a low late this year.

Despite the hedges and the protection from falling deposit costs, however, analysts have a subdued outlook for net interest income at Regions and Huntington. The consensus forecast for growth at Regions is 2% this year, falling to 0.5% in 2020. For Huntington, the consensus is 2.6% this year dropping to 1% next year. For both banks, the figures are close to the medians for the large bank group.