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Banks better get ready for a quick, steep increase in deposit costs after the Fed raises rates. Technology, new regulations and other factors have changed the slower-paced retail-banking game of old, JPMorgan Chase executives say.
July 14 -
The San Francisco bank has produced enough growth in mortgages, C&I and other areas and made other moves to offset low rates. It is a hopeful example for mortgage-heavy banks and other lenders battling tight margins.
April 14 -
Wells Fargo has eased off the gas pedal in auto lending, as concerns about weakening industrywide credit standards continue to spread.
January 14 -
The San Francisco bank stands to gain from stronger loan growth, but Wells may no longer be able to rely on releasing loss reserves as a source of profits. Compliance costs and energy market volatility add to the complicated 2015 outlook.
January 14
Wells Fargo Chief Executive John Stumpf refuses to make a prediction about when interest rates will rise, though analysts certainly tried to get him to do so Tuesday.
Stumpf instead sought to focus the discussion of his San Francisco bank's second-quarter results on its strong loan and deposit growth and seemed to take a contrarian view on where rates are headed.
"Of course we listen to what the chairwoman of the Fed [Janet Yellen] has to say about rates, but when we plan internally we don't consider rate increases as part of an ongoing justification for investing in anything," Stumpf said. "We don't know what's going to happen to rates, and if rates do increase, that's a benefit to us. But for the last five to six years, you could have said the same thing and it didn't happen."
Meanwhile, Wells' chief financial officer, John Shrewsberry, said he expects Treasury rates are "going to be lower for longer than we would have thought six months ago or a year ago." He said he is managing the balance sheet to reflect that change.
"What's happened with rates around the world is a reminder that a 2.5% U.S. 10-year [Treasury] is an attractive asset," Shrewsberry said. "We are preparing ourselves for a long march at the longer end of the [yield] curve."
Wells has been moving into higher-yielding assets, and it has more than $250 billion in cash to redirect if rates quickly turn higher, analysts said.
Analysts raised a host of concerns about the effect of rising interest rates on Wells' deposits, and of expected loan losses from energy companies. Yet, Wells posted solid loan growth and improved net interest margins, and Stumpf continues to be optimistic about the U.S. economy.
"Housing activity has been especially encouraging with the second quarter the best for home sales since 2007," Stumpf said, citing 8% deposit growth year over year and a 5% jump in new checking accounts. "These factors make me optimistic that the economic expansion will sustain momentum into the second half of the year."
Some analysts were alarmed about a $400 million increase in nonperforming assets by energy companies, which have taken a hit from falling oil prices. Though there may be further losses ahead, loans to energy firms make up just 2% of Wells' overall loan portfolio, Shrewsberry said.
"We feel great about where our [loan-loss] allowance is right now," Shrewsberry said. "The impact here is relatively immaterial to Wells Fargo. Minor changes in our residential real estate portfolio tend to dwarf what's going on in energy."
Stumpf, who has seen three or four downturns in the energy sector over the course of his career, said the current slump feels slightly different.
Energy exploration and production companies "are more conservative, they tend to be better capitalized and they've reacted more quickly than they have in past cycles," Stumpf said. "It's a very contained portion of our loan portfolio."
Still, banks have released enormous amounts of reserves in the past four years and oil and gas troubles may finally be the excuse for them to cut back on reserve releases, analysts said.
Mortgage lending was a bright spot for Wells, the largest U.S. home lender, and for other lenders.
Originations rose 27% in the second quarter to $62 billion, compared with the first quarter, and jumped 32% from a year earlier. Shrewsberry said lending in California, Colorado, Florida and New York was particularly strong, and home purchases made up 54% of total originations, compared with 45% in the first quarter.
"The business is good, there's plenty of credit available, margins are holding nicely and the pipeline looks good," he said. "All of that is a reflection of continued affordability. And we've had an improving jobs market which brings more people into eligibility."
Bill Carcache, an analyst at Nomura Securities, said he is concerned banks' deposit growth has outpaced loan growth since the financial crisis, but some banks should be concerned about low-quality deposits.
"I don't think Wells has been getting a lot of credit for the strong retail deposit franchise that it operates, and this dynamic will result in them getting more credit for the strength of that deposit franchise going forward," Carcache said.
Wells' net income fell slightly to $5.7 billion in the second quarter, or $1.03 a share, from a year earlier, and matched a consensus of analysts' estimates. Revenue rose 1% to $21.3 billion.
Deposits rose 9% to $1.1 trillion.
Core loans grew roughly 4% to $888.5 billion, though that growth included the
Commercial and industrial loans, excluding foreign loans, grew 6.3% from the first quarter, to $240 billion.
Wells' net interest margin, the difference in what it makes borrowers and lending, rose 2 basis points to 2.97% in the second quarter. That improvement followed more than three years of steady declines, analysts said.
Still, expenses appear to be growing slightly faster than revenue.
"People right away see expenses in the last four quarters are growing over 3% a year now, which is not a fast growth rate but it's a little bit fast for Wells," said Erik Oja, an analyst at S&P IQ. "Next quarter will be the test because with [the GE] acquisition there will be some impact on the net interest margin."
Commercial and industrial loans, excluding foreign loans, grew 6.3% from the first quarter, to $240 billion.
