By Noor Zainab Hussain, Manya Saini and Carolina Mandl
(Reuters) -Wells Fargo on Friday posted higher fourth-quarter profit, beating analysts' expectations as it cut costs.
But the lender warned that its net interest income (NII) could fall 7% to 9% this year, sending shares down more than 3%.
"We expect net interest income to decline from the high levels we saw as rates were rising last year," CEO Charlie Scharf told analysts. While the implied path for interest rates could weigh on the bank's NII, "significant uncertainty exists regarding eventual timing and extent of Federal Reserve interest rate actions."
The Fed's interest rate increases have made it more costly for banks to keep deposits for customers who are moving their money in search of higher yields.
When depositors leave or shift into higher-yielding products, "that's going to have a pretty substantial impact," Chief Financial Officer Mike Santomassimo said. "And so that is a big driver of what the (NII) decline is for the rest of the year."
At the same time, rising rates have also deterred borrower demand, weighing on a key source of income for banks. Wells Fargo (NYSE:WFC) sees a slight decline in average loans this year.
The lender's net income rose 9% to $3.4 billion, or 86 cents a share.
It forecast annual expenses would decline $3 billion from 2023, mainly on expected lower severance expenses. It took a onetime charge of $1.9 billion to refill a government fund that was drained of $16 billion after three regional lenders collapsed.
Wells Fargo booked $1.1 billion in severance costs in the fourth quarter, mainly for layoffs, although it also announced plans to hire bankers and advisers. This was higher than a December estimate.
Its headcount fell 5% to 225,869 employees at the end of 2023 versus a year earlier.
"Core earnings performance recovered nicely in 2023" as higher interest rates and efficiency gains offset the charge and severance expenses," wrote Mark Narron, a senior director at Fitch Ratings.
Rival Citigroup also plans to cut 20,000 jobs over the next two years.
Excluding items, Wells Fargo earned $1.26 per share, beating analysts' expectations of $1.17, according to LSEG estimates.
Revenue in the fourth quarter rose 2% to $20.5 billion, while non-interest expense dropped 2.5% in the quarter.
Analysts said the bank's outlook for NII came in below expectations.
Still, the company expects to buy back more shares this year than in 2023, Santomassimo said.
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.
Rivals JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) posted a drop in fourth-quarter profit, hit by charges to refill the Federal Deposit Insurance Corporation after last year's banking crisis.
Citigroup posted a loss on a slew of charges.
OFFICE LOANS WEAKNESS
Meanwhile, Wells Fargo raised its provisions to $1.28 billion to prepare for souring loans.
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.
Santomassimo said commercial real estate (CRE) stress is mainly concentrated in corporate office buildings, as the value of those properties dropped from one or two years ago.
The bank stockpiled more money to cover souring loans, particularly for credit cards and CRE, it said.
Its net charge-offs for CRE -- or the amount of loans that are unlikely to be recovered -- increased $284 million in the fourth quarter.