There are few banks in the United States as consistently efficient through the years as Wells Fargo (WFC 0.73%). But this reputation is now taking a hit.
Wells Fargo's second-quarter efficiency ratio, which measures the percent of revenue consumed by a bank's operating expenses, came in at 61.1% in the three months ended June 30. That was down from 62.7% in the first quarter, but nevertheless up from 58.1% in the second quarter of last year.
Meanwhile, Bank of America (BAC 1.31%), which has struggled with its efficiency ratio over the past decade thanks to elevated legal and operating costs stemming from the financial crisis, has been going in the opposite direction. Its efficiency ratio in the second quarter improved to 59.5%.
This was an impressive performance. In the first quarter, Bank of America's efficiency ratio was 66.2%. In the second quarter of last year, it was 62.7%.
In other words, at the same time Wells Fargo's efficiency ratio climbed above the 60% threshold that's commonly associated with high-performing banks, Bank of America dropped below it. Had you told a bank analyst early last year that this would happen, he or she would have thought you were crazy.
The changing of the guard, if you will, is a function of two trends. The first is an increase in expenses relative to revenue at Wells Fargo. It spent $13.5 billion in noninterest expenses in the second quarter compared with $12.9 billion in the year-ago quarter. That amounts to a 4.6% increase. Wells Fargo's revenue, by contrast, didn't budge, coming in at $26.2 billion in both quarters.
The increases came in the form of outside professional services and salaries, as well as higher operating losses, reflecting higher litigation expenses, the bank explained in its quarterly earnings release. The second quarter also included a $94 million donation to the Wells Fargo Foundation, the bank's charitable arm.
Wells Fargo has responded to the deterioration in its efficiency ratio with an initiative to cut expenses. As CEO Timothy Sloan explained in the bank's second-quarter conference call, the bank is targeting $2 billion of expense saves by the end of 2018, as well as an additional $2 billion of expense saves by the end of 2019.
Bank of America, on the other hand, has spent most of the past decade working through its own cost-cutting initiatives. Its latest goal, announced last year, is to trim annual operating expenses by $3 billion by the end of next year. And, mind you, this comes on top of $15 billion in annual costs that the bank had already cut at the time the latest initiative was announced.
While investors shouldn't read too much into the fact that Bank of America's efficiency ratio was lower than Wells Fargo's last quarter, as that could change just as quickly, it certainly reflects the evolving fortunes of these two banks over the past 12 months.