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Wells Fargo Cuts Net Interest Income Forecast on Low Loan Demand

Bloomberg logoBloomberg 9/14/2020 Hannah Levitt
a person walking down a sidewalk in front of a building: A pedestrian wearing a protective mask walks past a Wells Fargo & Co. bank branch in New York, U.S., on Thursday, July 9, 2020. Wells Fargo is scheduled to release earnings figures on July 14. © Bloomberg A pedestrian wearing a protective mask walks past a Wells Fargo & Co. bank branch in New York, U.S., on Thursday, July 9, 2020. Wells Fargo is scheduled to release earnings figures on July 14.

(Bloomberg) -- Wells Fargo & Co. trimmed its guidance for net interest income this year to $40.5 billion on lower expectations for loan growth.

The bank had previously said it expected 2020 net interest income -- revenue from customer loan payments minus what the bank pays depositors its largest source of revenue -- to drop to $41 billion to $42 billion, or down as much as 13% from last year. Weaker-than-expected loan demand is responsible for the more pessimistic forecast for its largest source of revenue, Chief Financial Officer John Shrewsberry said Monday at a financial-services conference sponsored by Barclays Plc.

“There’s so much liquidity, bond markets are wide open,” meaning large and midsize firms “are using the bond market to finance themselves” and credit-line utilization has been dropping, Shrewsberry said. “The demand for new credit, at least at this point in the cycle, is not particularly robust, and then people are refinancing out into securities.”

With just two weeks left in the third quarter, the largest U.S. banks are guiding investor expectations for how they’re faring through the Covid-19 pandemic. They set aside $35 billion for soured loans in the second quarter and cautioned that there was still a lot of uncertainty about how credit quality would fare during the rest of the year.

Read more: A $35 billion bite from U.S. bank profits may only be the start

“Some of the macro factors are probably a little bit stronger, or at least not worse, and the actual loss-taking or charge-off activity is getting pushed out,” Shrewsberry said. “For the whole industry, it’s probably a little too soon to say things are better than previously forecast. They’re probably not worse than previously forecast.”

On the consumer side, Wells Fargo isn’t anticipating losses to be worse, but “it’s hard to know whether they’re going to be better or just further out in the future” given deferral and government-stimulus programs, Shrewsberry said. On the commercial side, Wells Fargo has seen some “better realized outcomes” than it had expected.

Here are other takeaways from Shrewsberry’s remarks:

Chief Executive Officer Charlie Scharf’s review process is still under way. The firm is looking at businesses on a monthly basis, Shrewsberry said, “thinking about what’s core and non-core, thinking about what the highest priorities are to get to a level of operational excellence.”Fee income will probably be stronger in the third quarter compared with the three months through June on higher deposit, trust and investment, and card fees as well as strong results in the mortgage business.Trading probably hit the “high water mark” in the second quarter because “everything was going our way and the Street’s way,” the CFO said.

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