WASHINGTON — Bank earnings jumped 10.7% in the second quarter from a year earlier, to $48.3 billion, boosted by rising net interest income as banks kept expenses in check, the Federal Deposit Insurance Corp. said Tuesday.
The agency’s Quarterly Banking Profile said net interest income rose 9.1% from a year earlier, or $10.3 billion, while the net interest margin rose to 3.22%, from 3.08%. Noninterest income rose 1%, to $66.8 billion. Meanwhile, noninterest expenses rose 3.3%, to $108.6 billion, compared with the second quarter of 2016.
Though the report pointed to many positive signs for the industry, loan growth remained lackluster in the second quarter. The rate of annual loan growth slowed for a third consecutive quarter, with total loans and leases rising just 1.7%, or $161.2 billion, from the first quarter. Year over year, loans rose by 3.7%, compared with a 6.6% increase logged over 2015.
“This was another positive quarter for the banking industry,” FDIC Chairman Martin Gruenberg said in prepared remarks. “Revenue and net income growth were both strong, profitability reached a post-crisis high, net interest margins improved, and the number of unprofitable banks and ‘problem banks’ continued to fall.”
“However,” Gruenberg added, “as the economy enters the ninth year of an expansion characterized by modest growth, the annual rate of loan growth continued to slow for a third consecutive quarter.”
Overall, banks were profitable, with close to two-thirds of the industry reporting yearly growth in net income, compared with only 4% reporting a net loss. The industry’s average return on assets reached a post-crisis record, rising to 1.14% from 1.06% the year before.
The industry was confident enough to post a modest decrease in loan-loss reserves, which dropped just 0.2%, or $197 million, in the second quarter. The coverage ratio, measuring loan-loss reserves compared with noncurrent loans and leases, meanwhile, rose to 104.3% from 97.5%, the highest post-crisis level ever. This was driven by a 13.3%, or $1.1 billion, decrease in reserves for commercial loan losses by banks with assets over $1 billion. Those institutions' residential real estate loan-loss reserves fell by 5.5%, or $922 million, and their credit card reserves rose by 4.3%, or $1.4 billion.
The FDIC cautioned that some parts of the industry remained on shaky ground. “The interest rate environment and competitive lending conditions continue to pose challenges for many institutions,” Gruenberg said. “Some banks have responded to this environment by ‘reaching for yield’ through higher-risk and longer-term assets.”
Beyond the slowing loan growth, another worrying sign was the increase in charge-offs, which rose 11.2% year over year, to $11.3 billion. The increase was particularly acute for credit card chargeoffs, which rose by 24.5%, or $1.4 billion, over the same time period. This marked the seventh consecutive quarter of year-over-year loan losses, with the net chargeoff rate rising to 0.48%, from 0.45% from the first quarter.
James Chessen, the American Bankers Association’s chief economist, tempered concerns over the rising rate of toxic credit card loans. “While credit card chargeoffs inched up, delinquencies in this area have remained near historical lows as consumers have succeeded at keeping debt at manageable levels,” he said. “Banks excel at managing risk, particularly during times of uncertainty, and are well prepared for further increases in interest rates by the Fed that are expected to progress at a slow pace over the next year.”
Still, another area for concern was the high rate of long-maturing loans and securities maintained by banks. The proportion of assets with a three year or more maturity timeline stagnated at 35.4%, remaining close to the all-time high of 35.5% reached two quarters ago.
“Banks have been extending maturities to increase yields and maintain margins in a low-rate environment,” Gruenberg said. “However, this has left many institutions vulnerable to interest rate risk.”
Still, the amount of loans and leases that were 90 days or more past due fell by 6.7%, or $8.4 billion, from the first quarter. Noncurrent balances dropped in all major loan categories, including by 7.9% on residential mortgage loans and 9.5% in C&I loans.
The number of problem banks reached a post-crisis low, dropping to 105, from 112 last quarter.
“Overall asset quality remains strong,” Gruenberg said. “The industry’s capacity to absorb credit losses continues to improve as noncurrent loan balances decline and loan-loss reserves remain relatively stable.”
The industry saw these positive signs, and thinning ranks of community banks, as proof that regulatory relief needs to be enacted soon.
“Compliance costs helped push 62 smaller banks to merge or sell in just a three-month period,” Chessen said. “Not a single new bank started this past quarter, which is shocking in a growing economy and drives home the need for Congress to enact common-sense reforms to ease the burden on banks.”
In comments after the release of the QBP, Gruenberg said the economic environment is preventing investors from creating new banks. “The core issue around de novo formation is low interest rates,” he said. "This post-crisis period has been the longest period of zero or near-zero interest rates in the FDIC’s history.”
Gruenberg noted that the agency had recently lowered the amount of heightened scrutiny for newly formed banks from seven to the pre-crisis level of three years. “From the FDIC’s standpoint, we would like to do everything we can to encourage the formation of de novo institutions,” he said. “The FDIC has now approved six deposit insurance applications over the past 10 months.”
Community banks' steady growth continued, as they reported $5.7 billion in profits in the second quarter, an 8.5% increase from a year earlier. Their net interest income rose 8.9% to $18.4 billion and their net interest margin rose 3 basis points to 3.61%.
Community banks “continued to increase their lending to small businesses at a faster pace than the industry,” Gruenberg said. “Small loans to businesses by community banks rose 2.7% during the past year, compared to a 1% increase for the entire industry.”
Yet community banks' noninterest income also fell slightly, by 0.05%, while their larger counterparts logged an 1.6% increase. Meanwhile, noninterest expense rose 4.3%, to $15 billion, which was larger than the 3.3% industry average.
The Deposit Insurance Fund balance rose by $2.7 billion, to $87.6 billion, in the second quarter. The ratio of insured reserves to deposits reached 1.24%, a 4-basis-point increase from the first quarter and the highest level since 2005.
