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.

The bank's shares rose 3.5% to $73.68 in premarket trading on Wednesday.

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," Wells Fargo's Chief Financial Officer Michael Santomassimo said.

"Market participants feel more confident in their ability to execute on M&A."

Rival JPMorgan also beat profit expectations on investment banking strength and forecast 2025 net interest income above estimates.

Wells Fargo's investment banking fees jumped 59% to $725 million in the quarter compared with a year earlier.

Santomassimo added that the consumer continues to be strong with credit performance remaining quite stable.

Under CEO Charlie Scharf's leadership, Wells Fargo has sought to diversify its revenue by bolstering fee-based businesses, including investment banking and trading.

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 2023-end.

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) - the difference between what it earns on loans and pays out for deposits - fell about 7% to $11.84 billion in the quarter compared with a year earlier, hurt by the impact of 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.

The lender forecast 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.

Baird analyst David George said the company's forecast includes modest loan and deposit growth, securities reinvestment, two Federal Reserve interest rate cuts and that the bank's asset cap remains in place.

"If the asset cap is removed we expect Wells Fargo to lean into loan growth which likely drives some upside versus today's guide," George added.

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.