After battling a bloated expense base since the beginning of 2010, Bank of America can finally say that expenses are no longer its biggest concern. You can see this by comparing Bank of America's expenses to Wells Fargo's , which has long been one of the most efficient big banks in the country.
Data source: Quarterly financial supplements from Bank of America and Wells Fargo.
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At first glance, it seems like Bank of America still lags Wells Fargo on the expense front, as the former spent $13.8 billion in the third quarter compared to the latter's $12.4 billion. What's important to keep in mind, however, is that Bank of America is larger than Wells Fargo-- in terms of both assets and shareholders' equity.
If assets are the measure, Bank of America is 22.9% larger than Wells Fargo, with balance sheets of $2.15 billion and $1.75 billion, respectively. If tangible shareholders' equity is the measure, then Bank of America is 13.1% bigger.
Either way, after adjusting for size, the takeaway is that Bank of America was actually slightly more efficient than Wells Fargo last quarter. If you compare the banks' annualized expenses as a percentage of tangible common equity, for instance, you see that Bank of America spent less last quarter (33.7%) than Wells Fargo (34.2%).
Oddly, this same relationship doesn't come through when you compare Bank of America's and Wells Fargo's efficiency ratios, measuring the percentage of a bank's net revenue that's consumed by noninterest expenses. Bank of America reported a third-quarter efficiency ratio of 66%, compared to Wells Fargo's 56.7% -- for the record, lower is better.
But this oddity isn't the result of expenses; it's caused by Bank of America's lackluster revenue, the denominator in the efficiency ratio. In the same three-month stretch, Bank of America's net revenue equated to only 50% of its tangible common shareholders' equity, compared to Wells Fargo's 59%. After adjusting for size, this means Bank of America earns an astounding $14 billion less annual revenue than Wells Fargo.
Suffice it to say, then, that Bank of America's biggest challenge is no longer to cut expenses. It's biggest challenge now is to boost revenue in a low interest rate environment. This won't be easy, but it's necessary if Bank of America wants to compete on a level playing field with the likes of Wells Fargo.
The article Compared to Wells Fargo, Bank of America's Expenses Are Right Where They Should Be originally appeared on Fool.com.
John Maxfield has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Wells Fargo. The Motley Fool has the following options: long January 2016 $52 puts on Wells Fargo. The Motley Fool recommends Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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