Wells Fargo’s profit beats estimates as rising rates bolster earnings

April 14 (Reuters) – Wells Fargo & Co’s ( WFC.N ) earnings beat expectations for the first quarter on Friday as it profited more from higher interest rates, even as executives predicted tighter monetary policy would dampen economic activity.

The bank also reported a $643 million increase in allowances for credit losses, including for commercial real estate, credit card and auto loans.

Analysts have warned of further weakness in the commercial real estate (CRE) market as widespread telecommuting depletes offices in major cities. Wells Fargo executives detailed the bank’s exposure to CRE at length during a conference call with analysts.

“There are pockets of risks like commercial office real estate that are likely to affect institutions differently,” CEO Charlie Scharf said. “We proactively manage our own exposures.”

The company’s outstanding CRE loans totaled $154.7 billion, or 16% of total loans, with $35.7 billion in office loans at the end of March.

The office market continues to show signs of weakness due to lower demand, higher financing costs and challenging capital market conditions, CFO Mike Santomassimo said.

While meaningful losses haven’t materialized, “we expect to see more stress over time,” he said.

The bank’s shares rose 0.4 percent on Friday afternoon. They had risen more than 4% in premarket trade after the results beat expectations.

ECONOMIC OUTLOOK

While interest rate hikes have helped boost interest income at U.S. lenders in recent quarters, the gains have come with growing concerns about the economy as the Federal Reserve keeps interest rates “higher for longer.”

“Given the rate hikes, we expect some slowdown in the economy — but so far it’s been very strong. You can see that in the labor market as well,” Santomassimo said.

The bank set aside $1.21 billion in the quarter to cover potential loan losses, compared with a release of $787 million a year earlier.

Banks are building up rainy-day funds as fears of an economic slowdown grow from the Fed’s aggressive rate hikes, as well as the recent turmoil in the banking sector fueled by the failures of two mid-sized banks.

The collapse of Silicon Valley Bank and Signature Bank last month led to a rout in bank stocks as investors worried about broader weaknesses in the industry.

Wells Fargo contributed $5 billion as part of a group of major U.S. banks that injected a combined $30 billion into First Republic Bank ( FRC.N ) in March.

“We are pleased to have been in a strong position to help support the U.S. financial system during the recent events that affected the banking industry. Regional and community banks are an important part of our financial system,” Scharf said in a statement.

Deposits at Wells Fargo fell 2% to $1.36 trillion at the end of March, compared with $1.38 trillion at the end of last year.

PRICES INCREASED

Net interest income rose 45% from the same quarter a year ago, to $13.34 billion.

The bank earned $1.23 per share, excluding one-time items, for the quarter ended March 31. That compared with analysts’ average estimate of $1.13 per share, according to Refinitiv IBES data.

Higher interest rates also boosted JPMorgan Chase & Co’s ( JPM.N ) first-quarter earnings, with the biggest U.S. lender remaining resilient through the banking crisis.

“Both Wells Fargo and JP Morgan delivered very, very solid results, blowing past expected earnings. Deposits were down, but really these big banks have been so flooded with deposits over the last few years that they haven’t known how to put the money to work ,” said Opima CEO Octavio Marenzi.

“The only part of the businesses that looked weak was investment banking,” he added.

Average lending in the bank’s business banking division increased by 15%, while business loans increased by around 7% from the previous year.

Wells Fargo is also still working to contain the fallout from a scandal over its sales practices that led to large fines and a capital cap imposed by the Fed.

Overall, non-interest expenses fell to $13.68 billion from $13.85 billion a year earlier, mainly driven by lower operating losses.

In the fourth quarter of 2022, the bank had booked $3.3 billion in operating losses related to lawsuits, customer remediation and regulatory matters related to the scandal.

In 2020, Scharf said he was looking to cut $10 billion in costs over several years.

Wells Fargo’s total revenue rose 17% to $20.73 billion in the first quarter.

Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Saeed Azhar in New York; Editing by Sriraj Kalluvila

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