Wells Fargo’s interest-related income
Wells Fargo’s (WFC) first quarter earnings surpassed expectations but fell 5% YoY (year-over-year).
The net interest income increased by 6% to $11.7 billion. It was driven by growth in earnings assets and benefits from the increase in the rate hike in December. However, the net interest margin fell by 2 basis points YoY to 2.9% due to variable income sources.
With the Fed deciding to keep the federal funds rate unchanged during its March meeting, US banks’ (VFH)(IYF) margins came under pressure. Banks earn lower returns on their assets and lower interest-based income in a low-rate environment. US banks started the year expecting four rounds of rate hikes during the year. Higher interest rates lead to higher net interest income for banks. This results in higher profitability margins. However, the Fed retreated from its expected interest rate hikes. This led to more margin pressures.
Higher expenses drag Wells Fargo’s earnings
Non-interest expenses were 4% higher YoY at $13 billion due to seasonally higher employee benefits and increased operating lease expenses due to leases acquired in the GE capital transactions. The efficiency ratio inched higher to 58.7% from 58.4% in the last quarter. For fiscal 2016, the company expects to operate at its target efficiency ratio of 55%–59%. Wells Fargo’s operational efficiency is better than its peers reported last week. Let’s look at the ratio of peer banks in 1Q16: