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Wells Fargo’s Litigation Costs Impacting Efficiency and Profits

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Expense management

Wells Fargo (WFC) has seen its expenses rise in recent quarters on litigation accruals due to mortgage regulatory investigations, account sales practices, and other matters related to retail and corporate clients.

Other banks (IYF) including Goldman Sachs (GS), JPMorgan Chase (JPM), and Bank of America (BAC) saw their spending rise in 4Q17 primarily due to higher compensation.

Wells Fargo’s 4Q17 non-interest expense of $16.8 billion included operating losses of $3.5 billion, up from $1.3 billion in 3Q17. Operating losses have been denting its profitability and efficiency ratios in recent quarters. The trend can continue at least for 1H18, depending on the inflow of fresh applications and litigation.

Wells Fargo’s non-interest expenses also rose due to commissions and incentives, professional services, and advertising expenses. These expenses were partially offset by a $117.0 million gain on the sale of corporate property.

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Litigation key for efficiency ratios

Wells Fargo’s efficiency ratio has jumped in recent quarters owing to higher spending and operating losses. The ratios can improve substantially on a reduction of operating losses arising from litigation. The bank’s efficiency ratio deteriorated to 76.2% in 4Q17 compared to 65.7% in 3Q17.

In 4Q17, Wells Fargo posted employee costs of ~$8.4 billion, a rise of $0.5 billion from 3Q17 on higher salaries, commissions, and year-end bonuses. Operating losses, as well as expense management for maintaining or reducing expenses other than compensation, should be key from the bank’s perspective in a bid to improve its efficiency ratios in 2018.

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