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Which Banks Are Operating with the Highest Efficiency?

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Aug. 18 2017, Updated 4:41 a.m. ET

Controlled spending

Among the major US banks, Bank of America (BAC) has seen a decline in non-interest expenses over the past few quarters. In 2Q17, Bank of America’s expenses stood at ~$13.7 billion, representing a sequential decline. These expenses were partially offset by lower litigation and other operating costs.

BAC’s non-personnel expenses increased to $6.0 billion from $5.8 billion, reflecting an industry-wide trend. Banks have increased their spending on hiring strong teams and managers.

Bank of America achieved an operating leverage of 500 basis points in 2Q17. The bank (XLF) garnered a 60% efficiency ratio, compared to 63% in 2Q16, which reflects lower spending. An efficiency ratio is calculated as the percentage of operating expenses divided by net revenues.

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In 2017, JPMorgan Chase (JPM) expects its net interest income to increase by $4 billion. It also expects adjusted expenses of ~$58 billion, reflecting stable interest income and operating margins. Its interest income growth is expected to be mostly due to 8% expected loan growth with expected net charge-offs.

WFC’s high expenses

Wells Fargo (WFC) has seen relative underperformance with its expenses rising over the past few quarters. In 2Q17, the bank’s non-interest expenses stood at ~$13.5 billion, a rise of 5% over 2Q16. Wells Fargo’s efficiency ratio improved sequentially to 61.1%. However, it rose on a YoY (year-over-year) basis, reflecting declining margins, FDIC (Federal Deposit Insurance Corporation) and other deposits, higher employee spending, and professional services.

Citigroup’s (C) efficiency ratio was flat at 59% in 2Q17, the lowest among major bankers and reflecting stable spending and costs. The bank’s operating expenses grew 1% to ~$10.5 billion in 2Q17. On a constant-dollar basis, its expenses increased 2%, mainly due to performance-related compensation, investments, and business volumes. Its expenses were partially offset by efficiencies and sale of legacy assets.

Citigroup saw its credit costs rise to ~$1.7 billion, representing 22% growth on a YoY basis. The rise was mainly due to its net credit losses rise by $94.0 million to ~$1.7 billion and a lower reserve release of $16.0 million, compared with $256.0 million in 2Q16.

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