Citigroup, Wells Fargo profits decline as margins squeeze

Bloomberg

Citigroup Inc and Wells Fargo & Co reported second-quarter profit dropped from a year earlier as persistently low interest rates continued to squeeze lending margins. Citigroup reduced its forecast for net interest margin, the difference between what a bank charges for loans and pays depositors, while Wells Fargo said the UK’s vote to leave the European Union will probably keep interest rates low for the immediate future.
“It looks like there’s a lid on US yields for some period of time,” Wells Fargo Chief Financial Officer John Shrewsberry said in an interview on Bloomberg Television.
Citigroup’s second-quarter net income dropped 17 percent to US$4 billion, or US$1.24 a share, from a year earlier as revenue excluding accounting adjustments fell 8 percent to US$17.5 billion, the company said. Net interest margin fell 6 basis points to 2.86 percent from the first quarter, and the company lowered its forecast for the second half of 2016 to 2.90 percent from 2.95 percent.
The reduction reflects “somewhat lower loan yields as well as the absence of a previously assumed rate increase in the US,” Citigroup CFO John Gerspach said on a call with
analysts.
Wells Fargo, the largest US home lender, said net income slid 2.8 percent to US$5.6 billion, or US$1.01 a share, from a year earlier. Mortgage banking revenue declined 17 percent to US$1.41 billion, while the bank’s net interest margin decreased 4 basis points to 2.86 percent, falling short of some analysts’ estimates.
Revenue Growth
“Revenue growth has not been strong enough to offset growth in rising credit costs,” said Shannon Stemm, an analyst at Edward Jones & Co in St Louis. “Because of that, Wells Fargo, which historically has been a very consistent earnings-per-share grower, has seen earnings per share contract.”
US Bancorp and PNC Financial Services Group Inc, the nation’s largest regional banks, also posted second-quarter results. Minneapolis-based US Bancorp said profit climbed 2.6 percent to a record US$1.52 billion, or 83 cents a share, from a year earlier. PNC, based in Pittsburgh, reported net income dropped 5.3 percent to US$989 million, or
US$1.82 a share. Both lenders’ net interest margin narrowed in the
quarter.
Share Price
Wells Fargo shares fell 2.5 percent in New York trading to US$47.71, the worst performer in the 24-company KBW Bank Index. Citigroup slid 0.3 percent and PNC dropped 1 percent, while U.S. Bancorp advanced 1.6 percent.
Even with the tightened margins, San Francisco-based Wells Fargo was able to increase revenue from interest-bearing assets by 4 percent in the quarter and also expects to do so on a full-year basis, Shrewsberry said on a call with analysts.
“It’s still our plan, and our goal, and what we’re telling you is that we intend to grow net interest income, even if there are no rate moves,”
Shrewsberry said.
Wells Fargo’s provisions for credit losses more than tripled to US$1.07 billion from a year earlier, tied largely to the bank’s oil and gas portfolio, while net write-offs rose about 42 percent to US$924 million, the bank said.
“It was the energy portfolio which surprised to the downside,” Chris Wheeler, an analyst at Atlantic Equities LLP, wrote in a note to clients. “The oil and gas portfolio remains under significant pressure.”