Banks (XLF) are forced to realign their cost structures in order to remain profitable while containing rising costs during uncertain and volatile environments. Since the 2008 financial crisis, Wells Fargo has been focusing extensively on expense control mechanisms.
In 4Q16, Wells Fargo’s efficiency ratio was 61.2%, and operating expenses were 1% lower at $13.2 billion. Peers Bank of America (BAC) and JPMorgan Chase reported efficiency ratios of 65.1% and 59%, respectively.
During the quarter, the bank had higher professional services and legal expenses, a result of several legal investigations related to its fake account scam. As part of its cost-cutting measures, Wells Fargo plans to shut down 200 branches in 2017 and 2018, respectively. In 2016, the bank closed down 84 branches.
Efficiency ratio is a measure of operating expenses as a percent of net revenue. It shows how revenues fuel a bank’s operating expenses. A lower percentage is better, as it means lower expenses compared to revenues.