By Saeed Azhar, Noor Zainab Hussain and Manya Saini
(Reuters) -Wells Fargo's profit fell 7% in the first quarter, beating analysts' forecasts, as it paid more to hold customer deposits while demand from borrowers declined.
Its stock slid 2.1% after swinging between gains and losses. The volatility reflected uncertainty among investors about how much banks will bring in from interest payments in the coming months.
Wells Fargo's net interest income (NII) -- or the difference between what it earns on loans and pays out for deposits -- could fall 7% to 9% this year, it said. NII slid 8% to $12.23 billion in the first quarter.
"It's certainly challenging these days to forecast NII, given all of the volatility that we've seen across a lot of the different data points, as well as some of the uncertainty that's out there relative to how our clients are going to behave," finance chief Michael Santomassimo told reporters on a call.
The guidance is "conservative," and Wells Fargo could yet see bring in more income as interest rates stay higher for longer, CFRA analyst Alexander Yokum wrote in note. He upgraded the stock to a buy rating from hold.
Wells Fargo's adjusted profit of $1.26 per share came in ahead of analysts' estimates of $1.11, according to LSEG data, helped by revenue in corporate and investment banking, which gained almost 5%.
Bank of America analyst Ebrahim Poonawala reiterated his buy rating on the stock, saying the results and outlook supported a "constructive view."
The shifting U.S. interest rate outlook is an important factor that will drive banks' future profits. U.S. consumer prices increased more than expected in March, leading financial markets to anticipate that the Federal Reserve would delay cutting rates until September.
Higher rates had boosted lenders' earnings as they brought in more money from interest payments, but that benefit waned in the first quarter of 2024.
The NII forecast is based on expectations for three rate cuts this year, CFO Santomassimo told analysts.
The increased interest rate have also made it more costly for banks, prompting them to pay more to keep deposits from customers who are seeking higher yields.
Tighter monetary policy could also crimp borrower demand and dampen economic activity, including Wall Street dealmaking.
Wells Fargo also paid $284 million into a Federal Deposit Insurance Corp fund that was drained last year after three regional lenders failed.
Average loans fell $20.6 billion, or 2%, year-over-year, driven by declines in most loan categories, the bank said.
Rivals Citigroup posted lower profit as it spent more on severance payments and set aside money to refill the government deposit insurance fund, while JPMorgan Chase (NYSE:JPM)'s forecast for 2024 NII fell short of analysts' expectations.
Wells Fargo reduced its allowances for credit losses on office loans by $76 million to $2.4 billion in the first quarter.
"Our portfolio is still very healthy," Santomassimo said. The bank was not overly concerned about weakness in multi-family buildings and it does not have substantial exposure in rent stabilized properties, he added.
A surprise fourth-quarter loss at New York Community Bank fueled industry concerns about weakness in commercial real estate that expanded beyond offices into multi-family properties with more than five units.
EASING SCRUTINY
Credit card lending was a bright spot, while auto lending suffered a sharp 23% fall in the quarter.
The bank is operating under a $1.95 trillion asset cap that prevents it from growing until regulators deem it has fixed problems from a fake accounts scandal. While investors have speculated about a potential lifting of the growth limits, executives continued to say the decision was in the hands of regulators.
The lender still has eight open consent orders after the U.S. Office of the Comptroller of the Currency (OCC) terminated a 2016 punishment in February.
"We reached an important milestone in the first quarter when the OCC announced the termination of a consent order it issued in 2016 regarding sales practices misconduct," CEO Charlie Scharf said in a statement.
"The remaining risk and control work continues to be our top priority and we will not be satisfied until all work is complete," he added.
Scharf became CEO in 2019, the fourth person to lead Wells Fargo since the scandal first emerged. He has worked to turn the lender around, cutting costs and exiting businesses after it racked up billions in lawsuits and regulatory fines.
Overall, non-interest expenses rose 5% in the quarter, partly driven by the cost of replenishing a government deposit insurance fund, the bank said.
Wells Fargo's stock has climbed about 14.8% so far this year, compared with a 7.1% gain in the S&P 500 Banks Index, which tracks large lenders.