Because of the unstable interest rate environment, U.S. banks are finding it difficult to predict their earnings, and some have decided to play it safe for the rest of the year.

The Federal Reserve began raising interest rates in March 2022 to control inflation, which increased net interest income (NII), or the difference between what lenders make on loans and pay out for deposits. As a result, banks have seen high profits in recent quarters.

However, that beneficial impact has been diminishing, and the prognosis for rates is now hazy, especially in light of the fact that March inflation statistics exceeded Wall Street’s projections for the date on which the Fed would begin reducing rates.

“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 finance chief Michael Santomassimo said.

Lower loan balances and higher interest rates on funding costs—including the effect of clients switching to higher yielding deposit products—were the main causes of Wells Fargo’s 8% decline in net interest income in the first quarter. The bank restated on Friday that this year’s NII might drop from 7% to 9%.

According to JJ Kinahan, CEO of brokerage IG North America, “people know interest rates are uncertain, but rate changes have a faster effect on banks than other sectors.”

Similar difficulties in handling the shifting rates environment were mentioned by JPMorgan Chase. On a conference call with analysts after the company’s earnings, Chief Financial Officer Jeremy Barnum stated that although the company’s current guidance was not much different from the fourth quarter’s, it was based on the “current yield curve, which is a little bit stale now.”

Although JPM stated that NII increased by 11%, it predicted that interest income for the entire year would fall short of analysts’ projections. The CEOs of JPM have been warning for months that the company’s rapidly increasing NII was unsustainable.

“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, an investment analyst at T. Rowe Price, stated that since higher expectations had already been factored in, banks would not benefit much from “sticking your neck out early in the year” and being overly bullish about NII.

Net interest income at Citigroup grew by 1% annually. The bank predicted that noninterest-bearing revenue would be the main source of growth, hence NII excluding markets would only slightly increase. The less rate cuts anticipated this year, according to Citi CFO Mark Mason, “have a material impact” on the bank’s projections.

According to Mark Narron, senior director at Fitch Ratings, “early indications are that banks will mostly maintain their relatively downbeat 2024 net interest income guidance, notwithstanding a supportive higher-for-longer rate environment.”

Banks had a generally favourable outlook on the economy; Dimon stated that consumers still had plenty of money to spend and that the economy was still healthy.

“The Fed’s policy of extremely high short-term rates clearly affects banks,” stated Cherry Lane Investments partner Rick Meckler. The fact that the economy hasn’t slowed down and that bank profits are so closely correlated with the state of the economy has always surprised me.

(Adapted from USNews.com)