Reduced Loan Loss Provisions Drive Banker Profitability in Q3

Commercial banks and savings institutions with FDIC insurance have seen a sizable increase in profitability over the last year according to the FDIC. 

The 7,760 banks that reported to the FDIC stated an aggregate profit of $14.5 billion in the third quarter.  This is an increase of $12.5 billion from the aggregate profit in the third quarter of 2009 and is the fifth consecutive quarter that earnings have registered a year-over-year increase.

The primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. While still high, at $34.9 billion, quarterly provisions were $28 billion (44.5 percent) lower than a year earlier. Net interest income was $8.1 billion (8.1 percent) higher than a year ago, and realized gains on securities and other assets improved by $7.3 billion from a year ago.

The quality of assets in the banks' portfolios continue to slowly improve although delinquencies remain high.  The amount of loans and leases that were noncurrent (90 days or more past due or in nonaccrual status) fell for a second consecutive quarter. Insured banks and thrifts charged off $42.9 billion in uncollectible loans during the quarter, down $8.1 billion (15.8 percent) from a year earlier. This is the second quarter in a row that net charge-offs posted a year-over-year decline.

"The industry continues making progress in recovering from the financial crisis. Credit performance has been improving, and we remain cautiously optimistic about the outlook," said FDIC Chairman Sheila C. Bair. "Lower provisions for loan losses are driving bank earnings by allowing a larger share of revenues to reach the bottom line."

But Chairman Bair also said, "At this point in the credit cycle it is too early for institutions to be reducing reserves without strong evidence of sustainable, improving loan performance and reduced loss rates. When it comes to the adequacy of reserves, institutions should always err on the side of caution."

Total interest income was $133.47 billion during the period, down from $134.21 billion in the third quarter of 2009, but net interest income increased from $99.4 billion to $107.5 due mainly to a 25% drop in interest expense related to domestic office deposits. Almost two-thirds of all institutions (63.3 percent) reported improvements in their quarterly net income from a year ago, but nearly one in five institutions (18.9 percent) had a net loss for the quarter. The average return on assets (ROA), a basic yardstick of profitability, rose to 0.44 percent, from 0.06 percent a year ago.

Total assets increased by $163 billion (1.2 percent) during the quarter. Investment securities holdings increased by $113.7 billion (4.5 percent). Assets in trading accounts rose by $86.9 billion (12.8 percent). At the end of the third quarter 2010 participating banks owned a total of $1.44 trillion in mortgage backed securities compared to $1.39 trillion a year earlier. Here is a breakdown of real estate assets owned as a percentage of total assets.

Institutions in the aggregate held $4.3 trillion in real estate loans of which $1.88 trillion were secured by 1-4 unit family homes, down from $1.92 trillion year-over-year.  Commercial loans increased from 1.27 trillion in 2009Q3 to $1.17 trillion in the most recent period.

Loans Secured by Real Estate ($ millions)

Charge Offs- All Real Estate Loans ($ millions)

Loans Secured by 1-4 Family Homes ($ millions)

Bair noted that the end of a two-year period of contraction in loan portfolios may be over. "Total loans and leases held by FDIC-insured institutions declined by just $6.8 billion, or 0.1 percent, in the third quarter," she said. "Many large banks have had sizable reductions in their loan portfolios over the past couple of years, but in the third quarter, such reductions were notably absent. I hope we are close to seeing genuine increases in loan balances again."

The number of troubled institutions on the FDIC's watch list increased from 829 to 860, the highest number on the list since 1993.  The total assets of those banks however declined from $403 billion to $379 billion. Forty-one insured institutions failed during the third quarter, for a total thus far in 2010 of 127.

Despite the continuing bank failures, the  balance improved from negative $15.2 billion to negative $8 billion during the third quarter. The improvement stemmed primarily from assessment revenues and from a reduction in the contingent loss reserve. This reserve, which covers the costs of expected failures, declined from $27.5 billion to $21.3 billion during the quarter. While part of the decline reflects the removal of amounts reserved for banks that failed, part also reflects lower costs for future failures.

Chart Source: http://www2.fdic.gov/qbp/2010sep/grbook/QBPGR.pdf