By Noor Zainab Hussain, Manya Saini and Saeed Azhar
(Reuters) -Wells Fargo beat analysts' third-quarter profit estimates and raised its annual forecast for income from interest payments on Friday, as customers paid more to borrow.
The fourth-biggest U.S. bank now expects 2023 net interest income (NII) - the difference between what it earns on loans and pays out on deposits - to climb about 16% from a year earlier, compared with a previous forecast of 14%.
Although the swiftest tightening of U.S. monetary policy in 40 years, aimed at reining in persistent inflation, has buoyed interest income, bank executives sounded a note of caution.
"While the economy has continued to be resilient, we are seeing the impact of the slowing economy with loan balances declining and charge-offs continuing to deteriorate modestly," Wells Fargo CEO Charlie Scharf said in a statement.
Wells Fargo shares rose 2% in premarket trading after its results, which showed the bank's NII climbed 8% to $13.1 billion in the third quarter.
Rival banking giant JPMorgan Chase (NYSE:JPM)'s profit surged in the third quarter as higher interest rates boosted its income from loans, it reported earlier Friday. Citigroup (NYSE:C)'s profit was broadly steady as it benefited from rising interest payments and surging investment banking fees.
Excluding items, Wells Fargo earned $1.39 per share in the third quarter, beating analysts' expectations of $1.24 per share, according to LSEG estimates.
The bank posted a decline in total deposits to $1.34 trillion from $1.41 trillion a year earlier. As interest rates rose, some customers have moved their cash into money market funds in search of higher yields.
Deposits have also been in focus after customers precipitated the collapse of three regional lenders earlier this year by rushing to pull out their money.
'SEEING WEAKNESS'
Wells Fargo, which is working to fix a six-year-old scandal over sales practices, said provision for credit losses in the quarter included a $333 million rise in the allowance for credit losses, primarily for commercial real estate office loans.
"The office portfolio, in particular in the commercial real estate sector, is the place where we're seeing weakness," Wells Fargo's finance chief Michael Santomassimo told reporters on an earnings call.
"We do expect to see some losses there over time, but we haven't seen anything significant yet," he added.
The bank made 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.
U.S. lenders generally are anticipating weakness in commercial real estate (CRE), particularly in office loans. Financing costs have risen for many CRE owners whose buildings have higher vacancies as more employees opt to work from home.
Wells Fargo's quarterly revenue of $20.86 billion also comfortably topped expectations of $20.11 billion.
The bank also raised its 2023 expense forecast to about $51.5 billion, up from an earlier estimate of about $51 billion.
Despite U.S. proposals that would require Wells Fargo to raise its capital levels, the bank said it aims to return more capital to shareholders.