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Why Wells Fargo Stock Underperformed the Banking Industry YTD

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Aug. 28 2018, Updated 4:45 p.m. ET

WFC underperformed the industry and its peers

Wells Fargo (WFC) stock has underperformed the banking industry YTD (year-to-date). WFC stock has lost 3.3% of its value YTD, underperforming the 1.2% gain of the Financial Select Sector SPDR ETF (XLF). XLF tracks an index of S&P 500 financial stocks.

Among Wells Fargo’s peers, JPMorgan Chase (JPM), Bank of America (BAC), and U.S. Bancorp (USB) have gained 7.2%, 4.6%, and 0.8%, respectively, year-to-date.

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Factors impacting WFC’s stock price

Wells Fargo (WFC) is the largest home loan lender in the United States. Wells Fargo has navigated troubled waters for the last few quarters, as several ongoing litigation issues have taken a toll on the company’s profitability.

As we discussed in Part 1, Wells Fargo was recently fined $2.09 billion from the US Department of Justice for misrepresenting its loan quality. In April, the DoJ found that the company had fraudulently enrolled thousands of customers for various products and services without their knowledge. Wells Fargo was fined $1.0 billion for these actions.

Rising operating expenses over the last few quarters are a major concern for Wells Fargo. The company’s efficiency ratios for the first and second quarters have increased on a YoY (year-over-year) basis.

The efficiency ratio measures how well a company utilizes its assets and liabilities, and it’s calculated as non-interest expenses divided by revenues. So, a lower ratio indicates positive operations. Wells Fargo’s efficiency ratios for the first and second quarters rose 290 basis points and 400 basis points, respectively, on a YoY basis. This trend signifies that its operating expenses have been increasing drastically.

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