By Noor Zainab Hussain, Manya Saini and Saeed Azhar

(Reuters) -Wells Fargo raised its annual forecast for net interest income (NII) after its profit surged 57% in the second quarter, sending its shares modestly higher.

NII climbed 29% to $13.16 billion as the bank brought in more interest payments after the Federal Reserve increased borrowing costs to tame inflation.

“The U.S. economy continues to perform better than many had expected,” CEO Charlie Scharf said. “Although there will likely be continued economic slowing and uncertainty remains, it is quite possible the range of scenarios will narrow over the next few quarters.”

The fourth largest U.S. lender said NII is expected to be about 14% higher this year than last year’s $45 billion. It had earlier forecast a 10% rise.

Wells Fargo reported profit of $1.25 per share for the three months ended June 30, beating analysts’ average estimate of $1.16 per share, according to Refinitiv data.

The bank set aside $1.71 billion in provisions for credit losses in the second quarter, compared with $580 million a year earlier.

Shares of Wells Fargo rose 1% to $44.17 in midday trading.

REAL ESTATE WOES

The provision for credit losses included a $949 million increase in the allowance for potential losses in commercial real estate (CRE) office loans, as well as for higher credit card loan balances.

CRE has emerged as a big worry for banks as financing costs rise for many buildings that have been largely vacated by employees who opt to work remotely.

“We do expect that there will be more weakness in the market and it’ll take a while to play out,” said Wells Fargo Chief Financial Officer Michael Santomassimo during an earnings call with the media.

The higher provision also comes against the backdrop of growing worries around the health of the economy as the collapse of three regional lenders fueled a turmoil in the banking sector and prompted calls for tougher regulation.

Wells Fargo is still operating under an asset cap that prevents it from growing until regulators deem that it has fixed problems from a fake accounts scandal. The company still has nine open consent orders from banking regulators who require additional oversight of its practices.

Scharf has said Wells Fargo’s repair efforts could take several years.

When asked by an analyst on a conference call if the bank has submitted plans to regulators on its consent order related to mortgages, Scharf responded, “We’re not going to talk about that,” because the bank has discussed it “over, and over, and over again.”

In December, the U.S. Consumer Financial Protection Bureau hit Wells Fargo with its largest ever civil penalty as part of a $3.7 billion agreement to settle charges over widespread mismanagement of car loans, mortgages and bank accounts.

In January, Wells Fargo said it will slim down its home lending business by reducing its mortgage servicing portfolio and exiting the correspondent lending business.

Rival JPMorgan Chase posted a 67% jump in second-quarter profit on Friday as it earned more from borrowers’ interest payments and benefited from the purchase of regional lender First Republic Bank.

(Reporting by Noor Zainab Hussain and Manya Saini in Bengaluru and Saeed Azhar in New York; Editing by Lananh Nguyen, Arun Koyyur and Chizu Nomiyama)

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