Wells Fargo beats profit estimates on rising loan demand and cost cuts

Jan 14 (Reuters) – Wells Fargo & Co beat analysts’ estimates for fourth-quarter profit on Friday as a rebound in U.S. economic growth encouraged more customers to take out loans and the bank brought costs under control.

Earnings jumped 86% to $5.8 billion, or $1.38 per share, flattered by a $943 million gain from the sale of certain businesses and an $875 million reserve release following pandemic-related losses that did not materialize.

Average loans were down 3% from the fourth quarter of last year, although the bank noted that loans increased in the last six weeks of 2021. “End of period” loans increased by 1% compared to the same period last year, and increased by 4% from the third quarter.

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“The strength of the economy continues to have a positive impact on our customers and our bottom line,” chief executive Charlie Scharf said in a call with analysts.

The bank’s shares rose 3.2% in afternoon trading on Friday and have gained 20% year-to-date. Read more

The other lever Wells used to increase revenue was spending. Scharf has made cost-cutting a cornerstone of its turnaround plan, targeting $10 billion in savings a year over the long term.

The bank cut non-interest expenses by 11% to $13.2 billion by cutting staff costs, the number of bank branches and its office space.

The company’s workforce fell more than 7% from a year ago, from 269,000 to 249,000 employees, as the bank laid off 20% of managers who had only a few direct reports and 40% of non-engineering technology workers.

Wells Fargo closed 270 branches and reduced branch staff in some locations as overall cashier transactions fell 30% from pre-pandemic levels, executives said.

With fewer office workers, the bank offloaded 7% of its office property portfolio in 2021 and plans to reduce it by another 5% this year.

And Scharf said they were far from done.

“If you go back more than a decade, one of the strengths of this company has never been efficiency,” Scharf said. “As we get the efficiencies that we’re starting to see, it’s like peeling the onion. The next set of opportunities becomes even clearer.”

ASSETS CEILING

The fourth-largest US bank has been in the regulators’ sanctions bench since 2016, when a sales practices scandal was exposed, and it has paid billions in fines and restitution.

Wells Fargo also operates under a $1.95 trillion asset cap imposed by the Federal Reserve in 2018, which limited its ability to increase interest income by improving loan and deposit growth.

“We still have a multi-year effort to meet our regulatory requirements — with setbacks likely to continue along the way — and we continue our work to put exposures related to our historic practices behind us,” Scharf said.

Still, Chief Financial Officer Mike Santomassimo said Wells could see up to an 8% increase in net interest income this year compared to 2021 if loan growth projections and interest rate hikes from the Federal Reserve are holding up.

According to Refinitiv estimates, Wells Fargo earned $1.25 per share excluding items, versus an average analyst expectation of $1.13.

Total revenue rose 13% to $20.9 billion, also beating estimates of $18.9 billion. Net interest income decreased 1% in the quarter.

Meanwhile, on Friday, JPMorgan Chase & Co (JPM.N) and Citigroup Inc (CN) both beat analysts’ earnings estimates. While profits at JPMorgan, the nation’s largest lender, were hit by a slowdown in its trading arm, an outstanding performance by its investment bank softened the impact. Read more

Investors focused on banks benefiting from the US Federal Reserve indicating it may raise interest rates sooner than expected due to steady inflation. Read more

“If (Wells) can maintain the momentum he has right now on spending cuts…they have tailwinds this year from rising rates and an improving economy, which should benefit loan growth and increase net interest income,” said John Mackerey, an analyst at DBRS Morningstar.

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Reporting by Noor Zainab Hussain in Bengaluru and Elizabeth Dilts-Marshall in New York; Editing by Sriraj Kalluvila and Nick Zieminski

Our standards: The Thomson Reuters Trust Principles.

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