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Wells Fargo expects steep drop in Q4 net interest income, more declines in 2020

Wells Fargo & Co. executives said declines in net interest income would persist in the fourth quarter before moderating slightly in 2020.

On the bank's third-quarter earnings call, management reiterated previously issued guidance that net interest income, or NII, would be down 6% for the full year. Following a third-quarter earnings report that showed $11.6 billion of NII, the guidance suggested NII would come in at $11.0 billion in the fourth quarter, which would be more than 13% lower than the 2018 fourth-quarter figure.

During the call's question-and-answer session, Saul Martinez, an analyst for UBS Securities, asked to confirm the 2019 fourth-quarter figure as meaning "roughly $11 billion" since it would represent "substantial declines in NII and [net interest margin] degradation."

"I think it's the asset side that's fully reflecting the repricing down. We talked about the deposit cost not being higher, probably being a little bit lower. And it gets you to the types of numbers that you described — very close," CFO John Shrewsberry said in response.

Looking ahead, Shrewsberry offered some guidance for 2020 NII performance. For parameters, he used the implied forward curve as of Sept. 30, which had the Fed funds rate around 1.7% and the 10-year Treasury just under 1.7%. For the year ahead, the curve showed the Fed funds rate down to 1.2% with the 10-year Treasury at roughly the same level.

"That range of assumptions about loans and deposits probably gets us to down low- to mid-single digits in net interest income. Maybe not as much of a decline as from '18 to '19," he said.

Asked about the effects of the regulatory asset cap, Shrewsberry said it should be relatively minimal since the bank had multiple business lines that could be pursued to drive NII while projecting loan growth to continue but remain relatively modest.

"The low single-digit growth rates for loans and deposits is probably a reasonable proxy or a reasonable placeholder for thinking about how 2020 unfolds," he said.