On Friday, Wells Fargo (NYSE:WFC) reported higher-than-expected fourth-quarter profits, primarily driven by cost-cutting measures. However, the bank issued a cautionary note, signaling that net interest income in 2024 could see a decline of 7% to 9% compared to the previous year, leading to a 3% drop in shares.
The bank cited challenges posed by higher interest rates, as consumers seek alternatives with higher yields amid the Federal Reserve’s tightening cycle. The expected rate cuts in the coming year have also impacted Wells Fargo’s balance sheet. CEO Charlie Scharf acknowledged the uncertainty surrounding the timing and extent of Federal Reserve interest rate actions, making it a significant challenge for the bank.
Wells Fargo anticipates a slight decline in average loans for the current year and forecasts an annual expense reduction of $3 billion from 2023. This reduction is mainly attributed to anticipated lower severance expenses and a non-recurring $1.9 billion Federal Deposit Insurance Corporation (FDIC) special assessment aimed at replenishing a government fund depleted by $16 billion after the collapse of three regional lenders.
In the fourth quarter, the bank incurred $969 million in severance costs, primarily related to layoffs, while also expressing plans to hire bankers and advisers. Despite a 5% reduction in headcount from 2022, ending the year with 225,869 employees, Wells Fargo faces challenges akin to its rival Citigroup, which also plans to cut 20,000 jobs over the next two years.
Excluding items, Wells Fargo exceeded analysts’ expectations by earning $1.26 per share, compared to the estimated $1.17. Revenue for the fourth quarter rose by 2% to $20.5 billion, and non-interest expenses dropped by 2.5%.
Despite the cautionary note on net interest income, Chief Financial Officer Mike Santomassimo assured investors that Wells Fargo expects to conduct more share buybacks in 2024 than it did in the previous year.
However, Wells Fargo continues to operate under an asset cap imposed due to regulatory concerns stemming from a fake accounts scandal, limiting its growth until regulators are satisfied that the bank has addressed its issues. The bank currently faces nine open consent orders from regulators mandating additional oversight of its practices.
The bank also increased provisions to $1.28 billion to prepare for potential loan defaults. Concerns over office loans have intensified as the rise in remote and hybrid work has led to increased vacancies, making it challenging for building owners to repay their loans. CFO Santomassimo highlighted that the stress in commercial real estate (CRE) is concentrated on corporate office buildings across various regions, with the value of these properties dropping from previous years.
The increase in provisions for credit losses was driven by credit card and commercial real estate loans, with a notable $284 million rise in CRE net loan charge-offs in the fourth quarter.
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