The uncertain trajectory of interest rates is making it hard for U.S. banks to forecast profits and leading some to adopt a cautious stance for the remainder of the year.
But that positive effect has been waning, and the outlook for rates is now uncertain, particularly after March inflation data came in higher-than-expected, pushing out Wall Street's forecasts for when the Fed starts rate cuts.
"It's certainly challenging these days to forecast NII, given all of the volatility that we've seen across a lot of the different data points, as well as some of the uncertainty that's out there relative to how our clients are going to behave," Wells Fargo's (WFC.N) finance chief Michael Santomassimo said.
"People know interest rates are uncertain but rate changes have a faster effect on banks than other sectors," said JJ Kinahan, CEO of brokerage IG North America.
"You've got to be prepared for a range of outcomes, which we are," said Jamie Dimon on the analyst call. "All of these questions about interest rates and yield curves... We don't want to guess the outcome. I've never seen anyone actually positively predict a big inflection point in the economy literally in my life or in history."
Teddy Oakes, investment analyst at T. Rowe Price said there was little benefit to banks of "sticking your neck out early in the year" and being too optimistic on NII, as higher expectations had already been priced in.
At Citigroup (C.N) , net interest income increased 1% year-on-year. The bank forecast that NII excluding markets would be down modestly, as growth would be from noninterest-bearing revenue. Citi CFO Mark Mason said on a conference call that the fewer rate cuts expected this year don't "have a material impact" on the bank's guidance.
"Notwithstanding a supportive higher-for-longer rate environment, early indications are that banks will mostly maintain their relatively downbeat 2024 net interest income guidance," said Mark Narron, senior director at Fitch Ratings.
Banks were generally positive on the economy, with Dimon saying the economy remained strong with people having excess money to spend.
"There’s no doubt the Fed’s policy of very high short term rates impacts banks," said Rick Meckler, partner, Cherry Lane Investments. "The surprise has always been that the economy hasn’t slowed, and so much of bank earnings are tied to economic conditions.”
