Wells Fargo expects decline in net interest income, prompting share drop

Wells Fargo posted a higher fourth-quarter profit that exceeded analysts' expectations, fuelled by cost-cutting measures. However, the bank's warning of a potential 7 per cent to 9 per cent decrease in net interest income (NII) for the year ahead sent its shares down over 3 per cent.

CEO Charlie Scharf said, "We expect net interest income to decline from the high levels we saw as rates were rising last year," highlighting concerns about the impact of Federal Reserve interest rate actions and the uncertainty surrounding their timing and extent.

The Federal Reserve's rate hikes have increased the cost for banks to retain deposits, particularly as customers seek higher yields elsewhere. Chief Financial Officer Mike Santomassimo stressed on the significant impact on NII when depositors shift to higher-yielding products.

Simultaneously, rising rates have dampened borrower demand, leading to a slight projected decline in average loans for Wells Fargo this year. The bank's net income saw a 9 per cent increase to $3.4 billion or 86 cents per share.

Despite the positive financial performance, Wells Fargo anticipates a decline of $3 billion in annual expenses for 2024, primarily driven by lower severance expenses. The bank incurred a one-time charge of $1.9 billion to replenish a government fund drained after three regional lenders collapsed.

While the outlook for NII fell below expectations, Wells Fargo remains committed to share buybacks, with plans to repurchase more shares in 2024 compared to the previous year. The bank, still operating under an asset cap, is navigating challenges imposed by regulators following a fake accounts scandal.

As the bank prepares for potential loan challenges, it increased provisions to $1.28 billion, specifically addressing concerns about weakening office loans. The shift towards remote and hybrid work has led to increased vacancies in corporate office buildings, impacting the value of these properties and prompting the bank to bolster reserves for souring loans, particularly in credit cards and commercial real estate.

(With Reuters inputs)