• Low rates drag on Citigroup, Wells Fargo earnings

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    NEW YORK: Citigroup and Wells Fargo signaled Friday that Britain’s decision to exit the European Union will not significantly hit the US economy, but could extend earnings pressure from low interest rates.

    Both big US banks reported lower second-quarter earnings, due in part to the drag from low rates. Britain’s surprise Brexit vote in June is expected to delay the US Federal Reserve’s time-frame for tightening monetary policy and to spur more stimulus from other major central banks.

    “Our basic view towards rates in the last several months certainly has been lower for longer, and I think that continues,” said Citigroup chief financial officer John Gerspach.

    Citigroup’s second-quarter net income fell 17.5 percent from a year ago to $4.0 billion. Revenues were $17.6 billion, down 9.9 percent.

    Total loans at Citigroup, the fourth-largest US bank by assets, inched up by $2 billion to $634 billion.

    Results were boosted by lower expenses and a strong performance in some trading divisions, in part due to a pickup in activity related to Brexit, Gerspach said.

    Gerspach said the economic impact of Brexit would be limited, especially on the US economy.

    “We think that perhaps the whole UK referendum could have a somewhat small dampening effect on global GDP over the next several months,” he told reporters on a conference call. “Most of the impact… is probably going to be contained within Europe.”

    Wells Fargo executives pointed to broad-based loan growth across the economy in categories like credit cards, auto and first mortgages as confirming the fundamental strength of American consumers.

    At the same time, the bank reported a dip in the net interest margin, a closely watched benchmark that measures the gap between what banks make on loans versus what they pay out in interest.

    “Brexit has added to global economic uncertainty and could result in rates remaining lower for even longer than expected, putting pressure on reinvestment opportunities,” said Wells Fargo chief executive John Stumpf. “It’s a great time to be a borrower,” said John Shrewsbury, Wells Fargo chief financial officer, on an analyst conference call. “It’s a great time to be our customers.”

    Executives said the path to greater profitability lies with containing costs and further growing loans, especially in mortgages. Wells is the largest private mortgage lender in the US, and the second-largest bank by assets.

    It reported second-quarter net income of $5.6 billion, down 2.8 percent from the year-ago period. Revenues were up 4.0 percent at $22.2 billion.

    Overall loans at Wells Fargo rose 7.7 percent to $957.2 billion.

    Oil prices stabilize

    The two large US banks said the impact from crashing oil prices remained among the outstanding risks, but that the stabilization in oil prices had helped. Oil prices traded above $40 a barrel for most of the second quarter, up about $10 from the first quarter.

    Citigroup took $100 million in credit losses related to energy, but was not forced to increase its loan loss reserves, Gerspach said. Citigroup had lifted its reserves in the first quarter by $233 million due to energy-related loans.

    “The quality of our book is stable to improving,” he said. “So we feel very good about where we stand with energy exposure at this point in time.”

    Another good sign has been that clients in energy have been able to access capital markets, Gerspach said.

    Wells Fargo’s tone on oil was more muted, confirming that clients were able to access capital markets, but noting that the oil and gas portfolio remained “under pressure.”

    “We are generally cautious,” Shrewsberry said. “It’s a little premature to declare victory because prices are hovering in the $40s and who knows what the next couple of quarters brings?”

    Shares of Citigroup fell 0.6 percent to $44.19 in afternoon trade, while Wells Fargo dropped 2.8 percent to $47.59. AFP

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