The recent hike in the employee cost has resulted in profit fall for Wells Fargo & Co (NYSE:WFC). The largest U.S. Mortgage lender has been under pressure for the past few months due to low-interest rates in the country. As per the reports, it’s the first time in the last five years when Wells Fargo reported a reduction in quarterly profit.
Insights On The Issue:
The financial market in U.S. is under immense pressure due to stricter capital requirements and low-interest rates. The banks are trying their hard to increase margins, but nothing is working out due to persistent less attractive conditions for the financial industry. Even though the deposit base of Wells Fargo has increased in the last few months, but the continuous plunge in the interest rates has forced the company and some of its rivals to capitalize the prevailing market condition.
The net interest income has also started getting affected by the market conditions as higher-yielding loans are getting replaced by the lower yielding loans steadily. As soon as this announcement was made, Well Fargo shares plunged by 2% on Tuesday. The net interest margin, which is considered as a key measure of profitability also reduced from 3.20% to 2.95% in 1Q2015 on YoY basis.
Non-interest expenses of the company surged by 5% and touched a massive figure of $12.51 billion in the most recent quarter. The primary reason that led to this unexpected hike was nothing but the increment in the employee cost. Wells Fargo recruited extra work-force and paid incentives to employees that were nearing retirement.
According to Erik Oja of S&P Capital IQ, the employee base of the company elevated to 266,000 in this quarter from 265,000 in the previous quarter. Even after profit plunge, the senior management of the company stands still According to John Stumpf, CEO, Wells Fargo & Co (NYSE:WFC), the company would rise back in the near future.