Wells Fargo warns of lower interest income in 2024, shares drop

By Noor Zainab Hussain, Manya Saini and Carolina Mandl

(Reuters) - Wells Fargo on Friday posted higher fourth-quarter profit, beating analysts' expectation on cost cuts, but the lender warned that 2024 net interest income could be 7% to 9% lower than a year earlier, sending shares down 3%.

The bank said higher interest rates continue to pose a challenge for deposits, as consumers seek alternatives with higher yields, following the Federal Reserve tightening cycle. Expected cut rates this year have also impacted the bank's balance sheet.

"Significant uncertainty exists regarding eventual timing and extends the Federal Reserve interest rate actions," Chief Executive Officer Charlie Scharf told analysts.

Wells Fargo also sees a slight decline in average loans this year.

The bank forecast an annual expenses drop of $3 billion from 2023, mainly on expected lower severance expenses and a non-recurring $1.9 billion Federal Deposit Insurance Corporation special assessment aimed to refill the government fund that was drained of $16 billion after three regional lenders collapsed.

In the fourth quarter, Wells Fargo booked $969 million in severance costs, mainly for layoffs, although Wells Fargo also said it will hire bankers and advisers. Its headcount ended last year 5% down from 2022, at 225,869 employees.

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.

In notes to clients, different analysts mentioned that the outlook for net interest income came in below expected.

Despite the lower outlook for net interest income, Chief Financial Officer Mike Santomassimo said Wells Fargo expects to buyback more shares this year than in 2023.

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 and Bank of America 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, the bank 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.

CFO Santomassimo said CRE stress is mainly concentrated on corporate office buildings across different parts of the country, as the value of those properties dropped from one or two years ago.

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.

The bank saw a $284 million increase in CRE net loan charge-offs in the fourth quarter.

(Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Carolina Mandl in New York; Editing by Arun Koyyur and Nick Zieminski)