Aurelia Butler

(Reuters) -Shares of U.S. banks rose on Tuesday after a smaller-than-expected rise in inflation data indicated that the Federal Reserve is likely to keep interest rates unchanged this week, while Wells Fargo (NYSE:WFC)’s net interest income outlook also boosted investor optimism on the sector.U.S. consumer prices barely rose in May and the annual increase in inflation was the smallest in more than two years, though underlying price pressures remained strong, Labor Department data showed on Tuesday.Traders were also buoyed by positive comments from Wells Fargo’s Chief Financial Officer Mike Santomassimo, who said during a conference on Tuesday that the lender, one of the largest U.S. banks, still expects to see a bump in net interest income later this year. The Wells Fargo executive’s comments are in contrast to some of the guidance on net interest income coming out of regional banks for the second half of the year, said Jack Janasiewicz, portfolio manager at Natixis Investment Managers.”I think that puts a floor for some of the larger (banks) that are seeing stable outlooks for margins going forward,” he added.The S&P 500 Banks Index rose 1.14%, while the KBW Regional Banking Index gained about 2%. The S&P 500 Banks Index is up 5.4% this month, through Monday’s close. JPMorgan Chase (NYSE:JPM), Wells Fargo, Goldman Sachs (NYSE:GS), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C) and Bank of America (NYSE:BAC) advanced between 1% and 2%.Higher net interest income has helped cushion a slump in the banking sector’s market-sensitive business units such as investment banking and trading. Regional lenders rose after Comerica (NYSE:CMA) Inc announced on Tuesday that it was planning to exit mortgage banker finance business by the end of the year to improve its financial stability.Comerica was up 4.4%, while its peers PacWest Bancorp, Western Alliance (NYSE:WAL), U.S. Bancorp, Valley National Bancorp (NASDAQ:VLY) and KeyCorp (NYSE:KEY) gained between 0.1% and 5%. Zions Bancorporation (NASDAQ:ZION) shares fell 0.56% after its executives forecasted a slowdown in net interest income. More

TORONTO (Reuters) -Canada’s financial regulator is urging lenders to tackle risks from mortgage extensions at the “earliest opportunity” as many borrowers try to navigate higher mortgage costs after the Bank of Canada’s surprise rate hike last week.The Office of the Superintendent of Financial Institutions’ (OSFI) urgency underscores the concern about the risk accumulating in Canadian lenders’ books as the central bank has resumed interest rate hike after a four-month pause. Canada’s central bank has raised interest rates to a 22-year high of 4.75% and analysts are betting on another 25 points increase next month. Many major Canadian banks allowing holders of variable rate mortgages to extend their amortization period to keep their repayments at the same level, temporarily blunting the impact of higher borrowing costs but adding risks to borrowers later on.”OSFI expects a more prudent and active account management approach, including resolving negative amortization at the earliest opportunity as well as recognizing the higher risk of these loans in loss provisioning,” the regulator said in a statement to Reuters.”Our ongoing conversations with financial institutions have highlighted the importance of being proactive in managing all types of mortgage accounts, and to act before levels of borrower stress become unmanageable.” The regulator had warned in April that though the short-term fix to extend mortgage payment periods helped borrowers, it would keep them in debt for longer. Roughly half of the borrowers in early 2022 opted for a variable mortgage, taking advantage of the central bank’s low interest rates and discounts offered by lenders, but that number declined, with only 16.7% of borrowers opting for a variable-rate mortgage in January of this year, according to Canada’s housing agency CMHC. As the interest rate rises, the mortgage payment no longer covers the interest payment portion, which results in the mortgage balance and negative amortization. Desjardins analyst Royce Mendes noted that the big six Canadian banks had more than 20% of their mortgage portfolio with repayments greater than 30 years in the first quarter as a result of variable-rate loans that have become non-amortizing, up from roughly 2% of the mortgage portfolios the prior year.At the same time, variable-rate holders are facing at least 30% increases in payments to remain on their original schedule. As a result, some might opt to extend repayments, Mendes notes.To be sure, the amortization would still likely be kept below 30 years.Data from Bank of Canada in May showed about one-third of mortgages have seen an increase in payments compared with February 2022 – just before the Bank started raising its policy interest rate. The central bank anticipates nearly all mortgage holders will have seen their payments increase. Major banks have said that very few customers are opting to extend their mortgages, but analysts have warned the challenges will remain throughout the year. “We continue to view mortgage lending as a moderate revenue headwind for the Canadian banks… with added risk to the economy as mortgages renew at higher rates, pressuring disposable income,” KBW analyst Mike Rizvanovic said. At the same time, Canada’s biggest banks have set aside more funds to cover bad loans this quarter, anticipating more defaults and weakness in commercial real estate.”We believe risks are still elevated with the prospect of more rate hikes adding to the headwind on mortgage renewals,” Rizvanovic said. More

Economists expect the BoE to raise its main interest rate to 4.75% from 4.5% next week, and after the latest jobs data markets now see a 50% chance that BoE rates will peak at 6% early next year, up from the peak of 5.5% expected on Monday.”As I’m afraid this morning’s numbers illustrated, we’ve got a very tight labour market in this country,” Bailey told lawmakers on the House of Lords Economics Affairs committee. “We’ve had a fall in the supply of labour, which is showing signs of recovering, but very slowly, frankly,” Bailey said.Basic wages in the three months to April were 7.2% higher than a year earlier – the biggest increase on record, apart from periods during the COVID-19 pandemic when data was distorted.The BoE is closely watching pay growth for signs of how persistent inflation is likely to be. Britain had the joint-highest inflation among big rich economies in April at 8.7%.”We still think the rate of inflation is going to come down, but it’s taking a lot longer than expected,” Bailey said.Last month the BoE forecast inflation would drop to around 5% by the end of this year and be below its 2% target in early 2025.Bailey said British food price inflation had been slower to drop than global commodity prices, despite past reassurances from the Bank’s contacts in the retail industry that prices would fall.On food prices he said: “We’ve been told for some time, you know, they’ve reached their peak, they’re going to come down, the rate of inflation is going to come down. And then the contacts come back and say ‘Sorry, we got that one wrong.'” More