Bank Profits Rise as Loan Loss Provisions Ease
Commercial banks and savings institutions have increased quarterly earnings year over year for the 17 out of the last 18 quarters the Federal Deposit Insurance Corporation said today. Institutions insured by FDIC reported an aggregate net income of $40.3 billion during the fourth quarter of 2013, up $5.8 billion or 16.9 percent from the fourth quarter of 2012.
Fifty-three percent of the 6,812 insured institutions reporting had year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable fell to 12.2 percent, from 15 percent in the fourth quarter of 2012.
FDIC said that earnings increase came principally from the ability of the institutions to reduce their loan loss provisions by an aggregate of $8.1 billion to $7 billion, the 17th consecutive quarter these loss provisions have declined. There was a $2.8 billion (1.7 percent) year-over-year decline in net operating revenue to $166.1 billion as noninterest income fell by $4.2 billion (6.6 percent) and net interest income increased by $1.4 billion (1.3 percent).
The average return on assets (ROA) rose to 1.10 percent in the fourth quarter from 0.96 percent and the average return on equity (ROE) increased from 8.53 percent to 9.87 percent. Total noninterest expenses were $5.8 billion (5.3 percent) lower than in the fourth quarter of 2012.
"The trend of slow but steady improvement that has been underway in the banking industry since 2009 continued to gain ground," said FDIC Chairman Martin J. Gruenberg. "Asset quality improved, loan balances were up, and there were fewer troubled institutions. However, challenges remain in the industry. Narrow margins, modest loan growth, and a decline in mortgage refinancing activity have made it difficult for banks to increase revenue and profitability. Nonetheless, these results show a continuation of the recovery in the banking industry."
Asset quality indicators continued to improve as insured banks and thrifts charged off $11.7 billion in uncollectible loans during the quarter, down $6.8 billion (37 percent) from a year earlier. The amount of noncurrent loans and leases - those 90 days or more past due or in nonaccrual status - fell by $14 billion (6.3 percent) during the quarter. The percentage of loans and leases that were noncurrent declined to 2.62 percent, the lowest level since the 2.35 percent posted at the end of the third quarter of 2008.
Net income for all of 2013 totaled $154.7 billion, an increase of $13.6 billion (9.6 percent) from 2012 and the ROA rose to 1.07 percent from 1.00 percent. More than half of all institutions (54.2 percent) reported higher net income in 2013, while only 7.8 percent were unprofitable, the lowest annual proportion of unprofitable institutions since 2005.
During the fourth quarter there was an increase of $90.9 billion (1.2 percent) in loan balances with all loan categories growing during the quarter except one-to-four family residential real estate loans. Home equity loan balances declined for a 19th consecutive quarter, falling by $6.9 billion (1.3 percent). Balances of other loans secured by one- to four-family residential real estate properties fell by $13 billion (0.7 percent), as the amount of mortgage loans sold during the quarter exceeded by $29 billion the amount of mortgage loans originated and intended for sale. For the 12 months through December 31, total loan and lease balances were up by $197.3 billion (2.6 percent).
One- to four-family residential real estate loans originated for sale in Q4 2013 dropped by 62 percent or $307.7 billion from the same quarter in 2012 largely due to the reduction in demand for refinancing as interest rates increased. Noninterest income from the sale, securitization and servicing of mortgages was $2.8 billion (34 percent) lower than a year ago. Realized gains on available-for-sale securities also were lower than a year ago, as higher medium- and long-term interest rates reduced the market values of fixed-rate securities. Banks reported $506 million in pretax income from realized gains in the fourth quarter, a decline of $1 billion (66.6 percent) from a year ago.
Two FDIC insured institutions failed during the fourth quarter compared to eight a year earlier and there were 24 failures during 2013, down from 51 in 2012. FDIC's problem bank list shrank from 515 banks to 467 during the fourth quarter putting it at about half the size it was when it peaked at 888 in the first quarter of 2011.
The unaudited Deposit Insurance Fund (DIF) balance was at $47.2 billion at the end of the fourth quarter compared to $40.8 billion at the end of the third due primarily to assessment income and a reduction in estimated losses from failed institution assets. Estimated insured deposits increased 0.7 percent, and the DIF reserve ratio - the fund's balance as a percentage of estimated insured deposits - rose to 0.79 percent as of December 31 from 0.68 percent as of September 30. A year ago, the DIF reserve ratio was 0.44 percent. By law, the DIF must achieve a minimum reserve ratio of 1.35 percent by 2020.