Wells Fargo’s fourth-quarter profit jumped as the lender benefited from cost cuts, but it warned that 2024 net interest income could be 7 per cent to 9 per cent lower than a year earlier, sending its shares down 1.8 per cent before the bell.

As the Federal Reserve raised interest rates, banks benefited by charging borrowers more on interest. With market participants forecasting rate cuts this year, banks’ interest income could start to erode.

“Our business performance remains sensitive to interest rates and the health of the US economy, but we are confident that the actions we are taking will drive stronger returns over the cycle, chief executive officer Charlie Scharf said in a statement.

Conversely, lower rates could tempt more consumers to take out loans, boosting another key source of income for banks.

Revenue in the fourth quarter rose 2 per cent to US$20.5 billion.

Net income rose to US$3.45 billion, or 86 US cents per share, for the three months ended Dec 31, the lender said on Friday (Jan 12). That compares with US$3.16 billion, or 75 US cents per share, a year earlier.

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Non-interest expense dropped 2.5 per cent in the quarter.

Wells Fargo is among a group of banking giants that are required to refill a government insurance fund that was drained of US$16 billion after three regional lenders collapsed.

It paid US$1.9 billion in special assessment fees to the regulator.

Wells Fargo is still operating under an asset cap that prevents it from growing until regulators deem it has fixed problems from a fake accounts scandal.

The bank has nine open consent orders from regulators mandating additional oversight of its practices.

Meanwhile, the bank raised its provisions to prepare for souring loans to US$1.28 billion.

Office loans have been a cause for concern. The rise in remote and hybrid work has spurred more vacancies, making it harder for building owners to pay back their loans.

Increases in the provision for credit losses was driven by credit card and commercial real estate (CRE) loans, the bank said.

The allowance also included higher net loan charge-offs for commercial real estate office and credit card loans.

Wells Fargo has in the recent quarters said it has shored up capital to absorb potential losses from commercial real estate.

The bank saw a US$284 million increase in CRE net loan charge-offs in the fourth quarter.

In December, CEO Scharf told investors that the bank expects to book higher-than-anticipated severance expenses between US$750 million to a little less than US$1 billion in the fourth quarter.

The bank incurred severance expenses of US$969 million, or 20 US cents per share. REUTERS