By Arasu Kannagi Basil, Nivedita Balu and Nupur Anand
(Reuters) -Wells Fargo’s profit beat expectations in the fourth quarter, powered by a rebound in dealmaking activity and forecast it would earn more from interest payments this year, sending shares up 6%.
The bank said that it has a solid pipeline in its investment banking business while its net interest income, or the difference between what it earns on loans and pays out on deposits, would begin to grow in 2025.
“We feel optimistic about where we are going into 2025 both because of where the economy is and the strength that has existed, as well as the business-friendly approach from the incoming administration,” CEO Charlie Scharf told analysts.
Wall Street was bolstered by a rebound in activity last year. Increasing confidence spurred companies to issue equity and debt. Corporations also struck deals, lifting volumes from a decade low in 2023.
“There’s a sense of optimism that people have for the activity levels that we should see in 2025 – that obviously needs to translate into actual deal activity,” Chief Financial Officer Michael Santomassimo said.
“Market participants feel more confident in their ability to execute on M&A.”
Rival JPMorgan posted record annual profit and Goldman Sachs earned its biggest quarterly profit in more than three years, both benefiting from a rebound in dealmaking activity.
Wells Fargo (NYSE:WFC)’s investment banking fees jumped 59% to $725 million in the quarter compared with a year earlier.
On the retail side, Santomassimo said that the consumer continues to be strong with credit performance remaining quite stable, however overall loan growth is expected to remain muted.
Activity in consumer and business banking segments is beginning to pick up after years of little to no growth, the lender said.
Under Scharf’s leadership, Wells Fargo has sought to diversify its revenue by bolstering fee-based businesses, including investment banking and trading.
Santomassimo also said losses would be lumpy in the office loan portfolio but it is not getting worse and may perform better than last year.
In October, the bank had warned that it may lose $2 billion to $3 billion on its commercial real estate office loan portfolio.
The bank also recorded severance expenses of $647 million in the quarter, lower than the $969 million a year earlier. Its headcount dropped to about 217,500 by the end of 2024, compared with nearly 226,000 at the end of 2023.
Severance is expected to be lower by $500 million in 2025, Santomassimo said.
On an adjusted basis, Wells Fargo earned $1.58 per share in the fourth quarter, beating analysts’ estimates of $1.35 per share, according to estimates compiled by LSEG.
Wells Fargo’s net interest income (NII) fell about 7% to $11.84 billion in the quarter compared with a year earlier, hurt by lower rates on floating rate assets and lower loan balances.
Despite the slide in NII, the bank projected interest income would begin to grow again in 2025, driven by a drop in deposit costs and a recovery in loan demand.
It expects NII to rise about 1% to 3% this year from the 2024 level of $47.68 billion. Analysts expect the bank to report an interest income of $47.13 billion in 2025.
The bank’s shares rose 6.2% to $75.66, largely driven by the better-than-expected forecast.
Analysts said investors would be pleased with the outlook considering Wall Street had projected a decline.
“If the asset cap is removed, we expect Wells Fargo to lean into loan growth which likely drives some upside versus today’s guide,” Baird analyst David George said, noting the forecast includes two Federal Reserve interest rate cuts.
REGULATORY FIXES
Under Scharf’s leadership, the bank has undergone a multi-year effort to fix compliance problems from a fake accounts scandal that erupted in 2016.
The Fed imposed a $1.95 trillion asset cap in 2018 that prevents Wells Fargo from growing until regulators deem it has fixed failings in its governance and risk management.
Scharf said last year the asset cap was curtailing the bank’s ability to take in more deposits and expand its trading business, two potential growth areas for Wells.
Reuters reported in November that Wells Fargo was in the last stages of a process to pass regulatory tests to lift the asset cap that could happen as early as the first half of 2025.
“I’m confident that we will successfully complete the work required in our consent orders and embed an operational risk and compliance mindset into our culture,” Scharf said on Wednesday.