Wells Fargo Beats Q4 Profit Expectations but Warns of 2024 Net Interest Income Decline

As the Federal Reserve continues to tighten its monetary policy, consumers are seeking higher-yield alternatives for their deposits, impacting the bank's balance sheet.

Wells Fargo reported a stronger-than-expected fourth-quarter profit, driven by cost-cutting measures, although it issued a cautionary warning about a potential 7% to 9% drop in net interest income for 2024, sending its shares down 3%.

The bank attributed this decline in net interest income to the ongoing challenge posed by higher interest rates.

As the Federal Reserve continues to tighten its monetary policy, consumers are seeking higher-yield alternatives for their deposits, impacting the bank’s balance sheet.

CEO Charlie Scharf acknowledged the uncertainty surrounding the timing and extent of the Federal Reserve’s interest rate actions.

Wells Fargo also anticipated a slight decrease in average loans for the year ahead.

However, the bank projected annual expenses to decrease by $3 billion in 2023, driven primarily by lower severance expenses and a one-time $1.9 billion Federal Deposit Insurance Corporation special assessment to replenish a government fund depleted by the collapse of three regional lenders.

In the fourth quarter, the bank incurred $969 million in severance costs, primarily due to layoffs, although it also announced plans to hire bankers and advisers.

The bank’s headcount decreased by 5% in 2023, totaling 225,869 employees.

Wells Fargo’s rival, Citigroup, also planned to reduce its workforce by 20,000 jobs over the next two years.

Excluding exceptional items, Wells Fargo’s earnings per share came in at $1.26, surpassing analysts’ expectations of $1.17.

The bank reported a 2% increase in fourth-quarter revenue to $20.5 billion, while non-interest expenses decreased by 2.5% during the quarter.

Nevertheless, some analysts expressed disappointment with the outlook for net interest income.

Despite the lowered outlook for net interest income, Chief Financial Officer Mike Santomassimo indicated that Wells Fargo intends to repurchase more shares in the current year compared to 2023.

The bank continues to operate under an asset cap imposed by regulators, preventing it from expanding until it addresses the issues stemming from a fake accounts scandal.

Wells Fargo also has nine open consent orders from regulators mandating increased oversight of its practices.

In anticipation of deteriorating loans, the bank increased its provisions to $1.28 billion.

Office loans have been a particular concern, as the shift to remote and hybrid work has led to more vacancies, making it challenging for building owners to service their loans.

This stress in the commercial real estate (CRE) sector primarily affects corporate office buildings nationwide, as their property values have declined over the past year or two.

The bank noted that the provision for credit losses was driven by credit card and CRE loans, including higher net loan charge-offs for commercial real estate office and credit card loans, resulting in a $284 million increase in CRE net loan charge-offs in the fourth quarter.