By Noor Zainab Hussain, Manya Saini and Saeed Azhar
(Reuters) -Wells Fargo's profit beat analysts' expectations in the third quarter as it set aside less money than expected to cover potential loan losses and predicted its interest income would improve, sending shares over 5% higher on Friday.
But the bank also forecast its net interest income would drop by 9% in 2024, more pessimistic than analyst expectations of an 8.4% decline, after the Federal Reserve cut borrowing costs last month.
Wells Fargo's net interest income could actually benefit from rate cuts because it will pay out less to clients to hang on to their deposits, its CFO Michael Santomassimo said during a media call.
The fourth quarter NII will be in line with the third-quarter, which could be seen as the beginning of a trough of NII, he said.
Santomassimo said rates are coming down on certificates of deposit, promotional savings instruments and on most interest-rate sensitive deposits in its commercial banking business.
"As we continue to see rate cuts, those trends will continue, and that'll be a net positive for NII as we look forward," he said.
The fourth-largest U.S. lender reported third-quarter earnings per share of $1.52, compared with expectations of $1.28, according to data from LSEG.
Wells Fargo's net interest income -- or the difference between what it earns on loans and pays out for deposits -- dropped 11% to $11.69 billion in the quarter.
Analysts on average had predicted $11.87 billion, according to estimates compiled by LSEG.
"Our risk and control work remains our top priority," said Chief Executive Officer Charlie Scharf. "Credit performance was consistent with our expectations, commercial loan demand remained tepid, we saw growth in deposit balances in all of our businesses."
Banks' interest income, which had benefited in recent years as the Fed raised interest rates, is expected to keep declining for the rest of 2024.
The U.S. central bank last month lowered its benchmark policy rate for the first time since 2020, cutting it by 50 basis points. Policymakers have projected another half of a percentage point reduction by the end of this year.
The rate cut was followed by top banks lowering prime lending rates, which will likely shrink their interest income. Banks have also tightened lending standards this year.
Santomassimo said consumer activity and spending remained quite strong.
Wells Fargo's revenue declined 2% to $20.37 billion in the third quarter.
The bank's loans to borrowers fell to $910.3 billion versus $943.2 billion a year earlier.
Loan demand has been subdued as higher interest rates deterred commercial and consumer borrowers. At the same time, banks have had to compete for deposits by paying clients more.
Wells Fargo set aside $1.07 billion in provisions to cover souring loans. That compared with $1.20 billion a year earlier.
Santomassimo said office remains the area of concern in the commercial real estate sector and expects additional losses in the segment over time.
JPMorgan Chase (NYSE:JPM)'s profit dropped in the third quarter as a bigger provision for potential loan defaults offset gains from investment banking, the bank said on Friday.
Executives at top lenders have said that U.S. consumers remain resilient despite pockets of stress and higher loan delinquencies among lower-income households.
Wells Fargo is also reportedly doubling down on efforts to lift a $1.95 trillion asset cap imposed by the Federal Reserve that prevents the bank from growing until regulators deem it has fixed problems dating back to the 2016 fake accounts scandal.
In September, a U.S. banking regulator found its safeguards against money laundering and other illegal transactions were too lax and restricted its ability to expand in risky businesses.
The asset cap curtails Wells Fargo's ability to take in more deposits and expand its trading business, two potential growth areas for the bank, CEO Scharf said earlier this year.
It still has eight regulatory punishments, called consent orders, that it is working to address.