Bank Profits Rise but FDIC Sounds Note of Caution

WASHINGTON – Banks and thrifts insured by the Federal Deposit Insurance Corp. reported aggregate third-quarter net income of $40.4 billion, the FDIC announced Tuesday, up $1.9 billion, or 5.1% from the same quarter a year ago.

The increase in profits was the result of $3.2 billion less in noninterest expense (such as wages, employee benefits, rents, litigation, data processing, advertising, FDIC premiums), especially litigation expense, the FDIC said.

Of the 6,270 banks and thrifts whose deposits the FDIC insures, nearly 60% reported higher earnings in the third quarter than the same period in 2014 while those that reported net losses fell to 5%, down from 6.6% a year earlier. It was the lowest number reporting a loss since the first quarter of 2005.

The earnings of the 5,812 community banks was $5.2 billion, the FDIC said, 7.5% higher than the third quarter of 2014. Net operating revenue of $22.4 billion was also 7.5% higher, or $1.6 billion above, a year ago.

“Earnings were up, loan portfolios grew, asset quality improved, the number of problem banks declined and only one insured institution failed,” noted FDIC Chairman Martin J. Gruenberg in a prepared statement. “While the industry had another positive quarter, there are signs of growing interest-rate risk and credit risk that warrant attention. History tells us that it is during this phase of the credit cycle when lending decisions are made that could lead to future losses.”

To mitigate the effect of low interest rates on net interest margins, banks continue to lengthen the maturities of their assets, the FDIC said, contributing to a growing mismatch between assets with longer maturities and

“This growing mismatch is important because when interest rates rise, the cost of funding liabilities tends to reprice more rapidly than yield assets, causing further compression to the interest margin,” the FDIC explained.

The reaction of the American Bankers Association, the trade group that represents most of the banking industry, was more optimistic.

Its chief economist, James Chessen, noted, “Asset quality continues to improve.”

Loan growth was “robust,” he wrote Tuesday, and the “driving factor behind another strong quarter for America’s banking industry. …

“Banks are well prepared to manage what is expected to be a slow and gradual increase in interest rates by the Fed. This gives institutions ample time to adjust while low interest rates will continue to attract business borrowers. With solid profitability, continually improving asset quality and strong capital levels, U.S. banks remain well positioned to make the loans that help drive economic growth.”

Copyright 2022 The Business Journal, Youngstown, Ohio.