Wells Fargo (NYSE:WFC) has exceeded analyst expectations for its third-quarter profits and revised its annual forecast for income from interest payments, driven by higher borrowing costs for customers.
The fourth-largest U.S. bank now anticipates that its 2023 net interest income (NII), which represents the difference between what it earns from loans and what it pays out on deposits, will increase by approximately 16% compared to the previous year. This is a higher projection than their previous estimate of 14%.
Despite the Federal Reserve’s swift and aggressive tightening of monetary policy, which aims to combat persistent inflation, boost interest income, Wells Fargo’s executives have expressed caution. The bank’s CEO, Charlie Scharf, pointed out that despite the economy’s resilience, they are witnessing the impact of a slowing economy with declining loan balances and slightly deteriorating charge-offs.
In the wake of these results, Wells Fargo’s shares rose by 2% in premarket trading. The bank reported that NII for the third quarter increased by 8% to $13.1 billion.
JPMorgan Chase, a rival banking giant, also reported a surge in profits in the third quarter, thanks to higher interest rates that boosted its income from loans. Citigroup’s profit remained largely steady, benefiting from rising interest payments and surging investment banking fees.
Excluding exceptional items, Wells Fargo earned $1.39 per share in the third quarter, surpassing analysts’ expectations of $1.24 per share, according to LSEG estimates.
Total deposits at the bank decreased from $1.41 trillion to $1.34 trillion in a year. As interest rates rose, some customers transferred their funds into money market funds in search of higher yields. Deposits have been under scrutiny after customers triggered the collapse of three regional lenders earlier this year by rapidly withdrawing their funds.
Wells Fargo is in the process of addressing a six-year-old scandal related to sales practices. The bank mentioned that its provision for credit losses in the quarter includes a $333 million increase in the allowance for credit losses, primarily for commercial real estate office loans.
According to the bank’s finance chief, Michael Santomassimo, the commercial real estate office sector is where they are observing weaknesses. They expect to see losses over time but haven’t seen anything significant yet.
Wells Fargo set aside a $359 million allowance for credit losses on the office segment of commercial real estate, bringing total allowances to $2.6 billion for the first nine months of 2023.
Many U.S. lenders are anticipating challenges in the commercial real estate (CRE) sector, particularly concerning office loans. Increased vacancies due to remote work arrangements have led to higher financing costs for CRE owners. Despite U.S. proposals that would require Wells Fargo to raise its capital levels, the bank has expressed its intention to return more capital to shareholders and maintain a cautious outlook given the challenges in the market.
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