Wells Fargo warns of further declines in net interest income

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Wells Fargo on Thursday reduced its full-year outlook for a key financial metric and warned that the coronavirus outbreak could have additional detrimental effects.

Chief Financial Officer John Shrewsberry said that he expects the bank’s net interest income in 2020 to decline in the mid-single digits of percentage points. Six weeks earlier, Wells Fargo forecast a full-year decline in the low-to-mid single digits.

The San Francisco-based bank’s latest guidance does not fully account for the events of the last few days, when financial markets have been rocked by fears about the possibility of a global pandemic, Shrewsberry said during remarks Thursday at an industry conference in Miami.

Sharp declines in U.S. stock prices this week have raised investors’ expectations that the Federal Reserve will cut interest rates. Borrowing costs have already declined recently as a result of a reduction in long-term bond yields.

“Markets are reflecting, obviously, a real risk-off tone,” Shrewsberry said. “The issue from here forward is: What does the Fed do, if anything? They say they’re likely to stand pat, and the market doesn’t seem to be looking at it that way.”

Wells Fargo’s net interest income — which measures the difference between the revenue the bank generates from loans and other assets and the cost of servicing deposits and other liabilities — tends to worsen when interest rates fall.

Certain businesses are suffering financially as a result of the coronavirus outbreak, Shrewsberry said. He specifically mentioned airlines, cruise lines and hotels, all of which are being hurt by fears about the chance of infection as a result of travel.

Shrewsberry said that some companies are likely to temper their enthusiasm for additional leverage as a result of the virus’ economic fallout. But he also noted the possibility that some firms will have a harder time accessing the capital markets and turn instead to borrowing lines at banks.

“That could be a benefit,” Shrewsberry said.

He also cautioned that if the U.S. business climate worsens, unemployment could rise, and consumers might have a harder time staying current on their loan obligations. But he added, “We’re not anywhere near that stage right now.”

For the last two years, Wells Fargo has been operating under an asset cap imposed by the Federal Reserve, which has limited its ability to grow its loan portfolio. In 2019, after initially providing a guidance range with a midpoint that showed flat net interest income for the full year, Wells Fargo made three downward revisions.

Ultimately, the bank’s net interest income fell by 6% in 2019 compared with the previous year.

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