Wells Fargo again lowers a key earnings target

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Wells Fargo lowered a key profitability target on Monday for the third time in five months, pointing to both the impact that lower interest rates are having on loan yields as well as their delayed ramifications for deposit pricing.

John Shrewsberry, the San Francisco bank’s chief financial officer, said at an industry conference that he currently expects net interest income this year to decline by 6% compared with 2018.

In July, Shrewsberry said that he anticipated a decline in net interest income of close to 5% this year. In April, Wells Fargo forecast a decrease of between 2% and 5%. Earlier, the bank had provided a range with a midpoint showing flat net interest income in 2019.

Shrewsberry said Monday that the bank now expects net interest income to fall by $1.8 billion in the second half of 2019 from the $24.4 billion that it generated in the first half of the year.

Half of Wells Fargo’s loans have variable rates, he said, which suggests that those loans will become less profitable when interest rates fall. And while there has historically been a time lag between a decline in interest rates and a decrease in deposit costs, that waiting period could be longer this cycle, Shrewsberry added.

Wells Fargo’s ability to lower its deposit prices without losing business may have been hurt by the reputational damage the $1.92 trillion-asset bank has suffered in recent years as a result of a slew of scandals.

But Shrewsberry argued Monday that other banks are also facing problems in the face of rate cuts by the Federal Reserve. “I do think that there will be a lot of pressure for banks in general if this environment persists,” he said at a conference organized by Barclays.

Shrewsberry forecast that Wells Fargo will see a 10% increase in mortgage originations between the second quarter and the third quarter. Lower interest rates have enabled many U.S. homeowners to refinance their mortgages, which has been a silver lining for banks in recent months.

But Wells Fargo’s projected bump in mortgage originations in the third quarter may fall short of Wall Street’s expectations.

Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods, had been anticipating that mortgage originations at Wells would rise by 41% in the third quarter.

Shares in Wells Fargo were up by 1.75% in midday trading Monday, compared with a 2.75% increase in the KBW Nasdaq Bank Index.

Shrewsberry had no real news to deliver on the status of the company’s search for a new CEO, which its board began in the spring following the abrupt departure of Tim Sloan.

“Consistent with what you’ve heard, it’s really in the board’s hands,” Shrewsberry said. “They are highly focused on it, but they’re doing it themselves — a very confidential exercise because of the nature of the people that I presume that they’re talking to.”

The bank’s long CEO search and uncommunicative posture appear to be bothering some investors. Before posing a question to Shrewsberry on Monday, one unidentified audience member said: “I think it’s kind of a joke that the board doesn’t update senior management on what’s going on with the search.”

In a poll of people who attended Shrewsberry’s presentation, 59% said that they are not invested in Wells Fargo. That number was up from 26% last year, according to Barclays analyst Jason Goldberg, who moderated the session.

“So it looks like the market is a bit more skeptical,” Goldberg said.

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Interest rates Mortgage rates Earnings Deposits Net interest margin John Shrewsberry Wells Fargo