By Noor Zainab Hussain and David Henry

(Reuters) - Wells Fargo & Co beat Wall Street profit expectations on Wednesday as it reduced bad loan provisions and reined-in costs, signalling the bank may finally be emerging from a sales practices scandal that has dogged it for nearly five years.

Profits at the country's fourth-largest lender rebounded to nearly $5 billion in the first quarter of 2021 as the improved economic outlook allowed it to cut its cushion for losses on pandemic-hit loans by $1.6 billion, and as it got a grip on costs relating to fixing its product mis-selling scandals.

It remained unclear, though, how much longer the bank expects to operate under a regulatory asset cap, which has curtailed loan and deposit growth needed to boost interest income and cover costs, while rival balance sheets have swelled.

Despite those constraints, the bank had benefited from the strengthening U.S. economy which has been boosted by the COVID-19 vaccination roll out, ultra-loose monetary policy, and additional fiscal stimulus, said chief executive Charles Scharf.

"We're in the midst of a multi-year transformation, and I'm confident that our operational and financial performance will continue to benefit from the progress we're making," he told analysts on a call on Wednesday during which executives declined to comment on when they believe the asset cap will be lifted.

The San Francisco-based bank's shares were up 5% in afternoon trading.

Controlling costs, which had been inflated by billions of dollars of regulatory and litigation penalties relating to the bank's sales scandal, is central to Scharf's turnaround plan. He said last year he is aiming to cut $10 billion from the bank's roughly $54 billion annual expense base over several years.

Wells Fargo said it spent 77 cents for each dollar of revenue it generated in the first quarter, a metric known as the expense ratio. While that was slightly up on the year-ago period, it was an improvement on the 83% of the last quarter of 2020.

Scharf declined to comment on projected costs through 2022, and cautioned analysts not to be overly optimistic on the work to be done to see the asset cap lifted.

"We have a tremendous amount of work to do," he added.

TEPID LOAN GROWTH

Wells Fargo profit was $4.74 billion, or $1.05 per share in the first quarter, from $653 million, or 1 penny per share, a year earlier. Analysts on average had expected a profit of 70 cents per share, according to the IBES estimate from Refinitiv.

That year-on-year profit jump was flattered by a huge provision for potential soured loans the bank made the same time last year as lenders braced for unpaid debts amid the shuttering of the economy which put millions of Americans out of work.

On Wednesday, the bank's Chief Financial Officer Mike Santomassimo told reporters the bank expected to further reduce loss reserves if the economy continues to improve. Consumers already are flush with cash from government stimulus and from loan payment forbearance programs, he noted.

"In a lot of cases, consumers have more money in their accounts today than they did pre-pandemic," he said.

However, Wells Fargo's pre-tax, pre-provision profit, seen this quarter as a better gauge of lenders' true performance, was down 13% from a year earlier. By comparison, JPMorgan said on Wednesday its first quarter pre-provision profit was up 18%, underscoring how Wells Fargo's profitability still lags rivals.

Average assets at JPMorgan Chase & Co also increased 25% in the first quarter to $3.61 trillion from a year earlier, while Wells Fargo's balance sheet shrank 1% to $1.94 trillion.

Wells Fargo's loan growth was also down, with average loans in its commercial banking division falling 19%, while JPMorgan's similar division reported a 2% decline.

The weak loan demand and low interest rates also hurt net interest income, which decreased 22%.

Average deposit balances at Wells Fargo were up 4%, from a year earlier, despite the banking system being flush with money as the Federal Reserve and the U.S. Treasury worked to support the economy during the pandemic.

JPMorgan said its deposits increased 36% from a year earlier.

Wells Fargo reported a 21% increase in deposits at its big consumer bank, compared with JPMorgan's 32% increase in consumer deposits.

(Reporting by Noor Zainab Hussain in Bengaluru and David Henry in New York; Editing by Sriraj Kalluvila, Michelle Price and Nick Zieminski)