By Noor Zainab Hussain, Manya Saini and Carolina Mandl
(Reuters) -Wells Fargo’s fourth-quarter profit jumped as the lender benefited from cost cuts, but it warned that 2024 net interest income could be 7% to 9% lower than a year earlier, sending its shares down 1.8% before the bell.
As the Federal Reserve raised interest rates, banks benefited by charging borrowers more on interest. With market participants forecasting rate cuts this year, banks’ interest income could start to erode.
“Our business performance remains sensitive to interest rates and the health of the U.S. economy, but we are confident that the actions we are taking will drive stronger returns over the cycle,” CEO Chief Executive Officer Charlie Scharf said in a statement.
Conversely, lower rates could tempt more consumers to take out loans, boosting another key source of income for banks.
Revenue in the fourth quarter rose 2% to $20.5 billion.
Net income rose to $3.45 billion, or 86 cents per share, for the three months ended Dec. 31, the lender said on Friday. That compares with $3.16 billion, or 75 cents per share, a year earlier.
Non-interest expense dropped 2.5% in the quarter.
Wells Fargo is among a group of banking giants that are required to refill a government insurance fund that was drained of $16 billion after three regional lenders collapsed.
It paid $1.9 billion in special assessment fees to the regulator.
Wells Fargo is still operating under an asset cap that prevents it from growing until regulators deem it has fixed problems from a fake accounts scandal.
The bank has nine open consent orders from regulators mandating additional oversight of its practices.
OFFICE LOANS WEAKNESS
Meanwhile, the bank raised its provisions to prepare for souring loans to $1.28 billion.
Office loans have been a cause for concern. The rise in remote and hybrid work has spurred more vacancies, making it harder for building owners to pay back their loans.
Increases in the provision for credit losses was driven by credit card and commercial real estate (CRE) loans, the bank said.
The allowance also included higher net loan charge-offs for commercial real estate office and credit card loans.
Wells Fargo has in the recent quarters said it has shored up capital to absorb potential losses from commercial real estate.
The bank saw a $284 million increase in CRE net loan charge-offs in the fourth quarter.
In December, CEO Scharf told investors that the bank expects to book higher-than-anticipated severance expenses between $750 million to a little less than $1 billion in the fourth quarter.
The bank incurred severance expenses of $969 million, or 20 cents per share.
(Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Carolina Mandl in New York; Editing by Arun Koyyur)
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