Wells Fargo’s earnings exceed estimates as higher rates boost income

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

The bank also announced an increase of $643 million in the provision for credit losses, including loans on commercial real estate, credit cards and cars.

Analysts have warned of further weakness in the commercial real estate market as remote work offices proliferate 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 risk such as commercial office real estate, that are likely to impact organizations differently,” said Chief Executive Officer Charlie Scharf. “We are proactively managing our exposure.”

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

Chief Financial Officer Mike Santomassimo said the office market continues to show signs of weakness due to lower demand, higher financing costs and tough capital market conditions.

He said that while significant losses did not materialize, “we expect to see more stress over time.”

Shares of the bank were up 0.4% on Friday afternoon. They were up more than 4% in pre-market trading after results beat expectations.

economic outlook

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

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“Looking at the rate of price increase, we would expect some slowdown in the economy – but it’s been very strong so far. You can also see that in the labor market,” Santomassimo said.

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

Banks are making money for rainy days as fears mount of an economic slowdown due to aggressive rate hikes from the Federal Reserve, as well as 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 sent a rout in bank stocks, as investors fretted about broader vulnerabilities in the industry.

Wells Fargo contributed $5 billion as part of a group of large US banks that put a total of $30 billion in deposits into First Republic Bank (FRCN) in March.

“We are pleased that we have been in a strong position to help support the American financial system during the recent events that have 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 to $1.38 trillion at the end of last year.

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price increase

Net interest income increased 45% compared to the same quarter last year, to $13.34 billion.

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

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Rising interest rates also boosted JPMorgan Chase & Co. (JPM.N)’s first-quarter earnings and the US’s largest bank remained resilient through the banking crisis.

“Both Wells Fargo and JP Morgan had very strong results, exceeding expected earnings. Deposits fell, but these big banks were really so overwhelmed with deposits over the past few years that they didn’t know how to put money in,” said Octavio Marenzi, CEO of Obemas.

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

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Average loans in the bank’s commercial banking division were up 15%, while commercial loans were up nearly 7% from a year earlier.

Wells Fargo is also still working to contain the fallout from a scandal over its sales practices that has led to hefty fines and an asset cap imposed by the Federal Reserve.

Overall, non-interest expenses decreased to $13.68 billion from $13.85 billion in the prior year, primarily driven by lower operating losses.

In the fourth quarter of 2022, the bank had $3.3 billion in operating losses related to litigation, customer handling and regulatory issues 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 increased 17% to $20.73 billion in the first quarter.

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

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