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Wells Fargo profit beats estimates as higher rates bolster interest income

A woman walks past Wells Fargo bank in New York City. - Reuters
A woman walks past Wells Fargo bank in New York City. - Reuters

WASHINGTON: Wells Fargo & Co on Friday beat profit expectations for the first quarter as the lender earned more from higher interest rates, while executives said the US economy is strong but expected to slow in response to tighter monetary policy.

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

While rate hikes have helped shore up interest income at US lenders in recent quarters, the gains have come with increasing worries that economic storm clouds will get heavier as the Federal Reserve keeps rates "higher for longer".

"There is a lot of activity in the economy," said Chief Financial Officer Mike Santomassimo.

"Given the rate of rate increases, we do expect some slowing in the economy - but so far its been very strong. You can also see that in the labor market," he added.

The provision included a $643 million rise in the allowance for credit losses reflecting an increase for commercial real estate loans, primarily office loans, as well as an increase for credit card and auto loans, the bank said.

Analysts have warned of further weakness in the commercial real estate (CRE) market amid the proliferation of remote working that has emptied out offices in major cities.

Wells Fargo said outstanding CRE loans were $154.7 billion, or 16% of total loans, with $35.7 billion in office loans at the end of March.

The bank's shares were up 4.14 per cent in premarket trading.

Banks are building up rainy day funds as fears of an economic slowdown mount from the Fed's aggressive interest rate hikes to tame inflation, 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 prompted a rout in bank stocks as investors fretted over broader weaknesses in the industry.

Wells Fargo contributed $5 billion as part of a group of large US banks that injected a combined $30 billion in deposits into First Republic Bank in March, throwing a lifeline as the regional lender got caught up in the crisis.

"We are glad to have been in a strong position to help support the US financial system during the recent events that impacted the banking industry. Regional and community banks are an important part of our financial system," CEO Charlie Scharf said in a statement on Friday.

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

Net-interest income surged 45 per cent 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 bolstered JPMorgan Chase & Co's profit in the first quarter and the biggest US lender remained resilient through the banking crisis.

"Both Wells Fargo and JP Morgan delivered very, very solid results, blowing past the expected earnings. Deposits were down, but really these big banks have been so awash in deposits for the past few years, that they have not known how to put the money to work," said Opimas CEO Octavio Marenzi.

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

Average loans in the bank's commercial banking division rose 15 per cent, while commercial loans rose roughly 7 per cent from a year earlier.

Wells Fargo is also still working to contain the fallout from a scandal over its sales practices that led to hefty fines and an asset 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 posted $3.3 billion in operating losses related to lawsuits, customer remediation and regulatory matters linked to the scandal. - Reuters

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