Please ensure Javascript is enabled for purposes of website accessibility

Bank of America Is Now More Efficient Than Wells Fargo

By John Maxfield - Updated Jun 8, 2021 at 11:02AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Their efficiency ratios are going in opposite directions.

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.

Wells Fargo branch sign.

Image source: The Motley Fool.

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.

John Maxfield owns shares of Bank of America and Wells Fargo. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$36.73 (1.31%) $0.47
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$46.09 (0.73%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.