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How Lower Expenses Drove Wells Fargo’s 4Q15 Earnings

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Jan. 19 2016, Updated 1:54 p.m. ET

Wells Fargo’s 4Q15 income statement

Wells Fargo & Company’s (WFC) 4Q15 earnings surpassed expectations. The bank has continued to display a consistent financial performance despite the volatile macro environment. Notably, the company’s net interest income increased by 4% to $11.6 billion, driven by growth in earnings assets and higher variable income. Its net interest margin, however, declined by 4 basis points compared to 3Q15 to 2.92% because its higher loan growth was offset by an even higher deposit growth.

Wells Fargo’s net interest income increased by $408 million compared to the same period one year previously, which reflects higher earnings assets. The company’s average earnings assets inched up by 3% to $44.6 billion while its non-interest income reached $9.9 billion—3% lower than in 3Q14.

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Wells Fargo’s lower expenses led to higher earnings

Wells Fargo’s non-interest expenses were 2% lower year-over-year at $12.4 billion. During the quarter, the company recorded lower operating losses as litigation accruals were lower. Despite the lower non-interest expenses, Wells Fargo’s management expects the efficiency ratio to inch higher toward 59% in 2016. The company’s efficiency ratio was 57.8% in 2015.

Wells Fargo attributes these high levels of expenses to spending on compliance, risk management, and technology. Although this will likely hurt the profitability of the company over the short run, in the longer run, the company should benefit from economies of scale in these areas.

Investors seeking exposure to US banks could invest in the Financial Select Sector SPDR ETF (XLF) or the Vanguard Financials ETF (VFH). Large banks like Wells Fargo (WFC), JP Morgan Chase & Company (JPM), Bank of America Corporation (BAC), and Citigroup (C) are well represented in their portfolios.

But how did plunging oil prices impact Wells Fargo’s 4Q15 earnings? Continue to the next part of this series to find out.

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