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NEW YORK: Wells Fargo & Co’s profit surpassed expectations for the first quarter on Friday as it earned more from higher interest rates, even while executives forecast tighter monetary policy would dampen economic activity.

The bank also reported a $643 million increase in the allowance for credit losses, including for loans on commercial real estate, credit cards and cars.

Analysts have warned of further weakness in the commercial real estate (CRE) market as widespread remote working emptied offices in major cities. Wells Fargo executives detailed the bank’s exposure to CRE at length during a conference call with analysts.

“There are pockets of risks such as commercial office real estate, which will likely impact institutions differently,” said CEO Charlie Scharf. “We’re proactively managing our own exposures.” The company’s outstanding CRE loans stood at $154.7 billion, or 16% of total loans, with $35.7 billion in office loans at the end of March.

The office market continues to show signs of weakness due to lower demand, higher financing costs and challenging capital market conditions, Chief Financial Officer Mike Santomassimo said.

While meaningful losses have not ye materialized, “we expect to see more stress over time,” he said.

The bank’s shares edged 0.4% higher on Friday afternoon. They had risen more than 4% in premarket trading after the results beat expectations.

While rate hikes have helped shore up interest income at US lenders in recent quarters, the gains have come with increasing worries about the economy as the Federal Reserve keeps rates “higher for longer.” “Given the rate of rate increases, we do expect some slowing in the economy - but so far its been very strong. You can also see that in the labor market,” Santomassimo said.

The bank set aside $1.21 billion in the quarter to cover for potential loan losses, compared to a release of $787 million a year earlier.

Banks are building up rainy day funds as fears of an economic slowdown mount from the Fed’s aggressive interest rate hikes, as well as the recent turmoil in the banking sector fueled by the failures of two mid-sized banks.

The collapse of Silicon Valley Bank and Signature Bank last month prompted a rout in bank stocks as investors fretted over broader weaknesses in the industry.

Wells Fargo contributed $5 billion as part of a group of large US banks that injected a combined $30 billion in deposits into First Republic Bank in March.

“We are glad to have been in a strong position to help support the US financial system during the recent events that impacted the banking industry. Regional and community banks are an important part of our financial system,” Scharf said in a statement.

Deposits at Wells Fargo fell 2% to $1.36 trillion at the end of March, compared with $1.38 trillion at the end of last year.

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