Wells Fargo profit falls as employee costs rise

(Reuters) - Wells Fargo & Co , the largest U.S. mortgage lender, reported a drop in quarterly profit for the first time in five years as employee costs rose at a time margins are under pressure from low interest rates.

Banks are struggling to boost margins as persistent low interest rates and stricter capital requirements offset any benefit from cost-saving initiatives.

Wells Fargo's shares fell 1.6 percent in early trading on Tuesday.

The bank's net interest margin, a key measure of profitability, fell to 2.95 percent in the first quarter ended March 31 from 3.20 percent a year earlier.

Non-interest expense rose about 5 percent to $12.51 billion, mainly due to higher employee incentives and benefits.

Wells Fargo also set aside $608 million to cover bad loans, an increase of about 87 percent from the same quarter a year earlier.

The bank, however, reported a better-than-expected profit as mortgage banking revenue rose after four quarters of decline, driven by a surge in refinancing due to low interest rates.

The average 30-year mortgage rate fell to as low as 3.59 percent in the first quarter of 2015, the lowest since May 2013, according to the Federal Home Loan Mortgage Corp. Rates in the year-earlier quarter averaged 4.35 percent on a monthly basis.

Wells Fargo's revenue from mortgage lending rose 2.4 percent to $1.55 billion, accounting for 14.6 percent of its non-interest income.

The bank said mortgage applications in the pipeline surged to $44 billion as of March 31 from $26 billion at the end of December.

JP Morgan Chase & Co , which reported results earlier on Tuesday, said net income from mortgage banking rose nearly three-fold in the first quarter.

Net income applicable to Wells Fargo's common shareholders fell about 2.7 percent to $5.46 billion, or $1.04 per share.

Revenue rose 3 percent to $21.28 billion.

Analysts on average had expected earnings of 98 cents per share and revenue of $21.24 billion, according to Thomson Reuters I/B/E/S.

Wells Fargo's income from credit cards, one of its major areas of expansion, rose 11 percent to $871 million.

The bank's shares were trading at $53.77 on the New York Stock Exchange. Up to Monday's close, the stock had fallen 0.4 percent this year, while the KBW index of bank stocks had fallen 1.3 percent.

(Editing by Kirti Pandey)