Banking Industry Problems Persist As Revenues Decline – Quarterly Banking Profile

Confirmation of weakness in the banking industry came today with the release of the March 31, 2011 FDIC Quarterly Banking Profile (QBP).  Most investors in banking stocks, with some exceptions, know that the performance of their bank stock investments has tracked the weak state of the economy and banking industry.

The widely followed KBW Bank Index shows that banking industry stocks have recovered from the depression levels of early 2009 but still trade at more than 50% off the levels seen prior to the banking crisis.



The Quarterly Banking Profile shows that banks reported total profits of $29 billion for first quarter 2011, a 66.5% improvement from March 2010.  Although this is the seventh consecutive increase in quarterly earnings year-over-year, the majority of “earnings” came from reduced loan loss provisions.

The total loan loss provisions for March 2011 were $20.7 billion, less than half the amount that institutions set aside a year ago.  FDIC Chairman Sheila Bair noted that “The industry shows continued signs of improvement, though there is a limit to how far reductions in loan-loss provisions can boast industry earnings.”

A slight majority of 56% of all institutions reported higher quarterly income from the prior year quarter while 15% reported losses.

Asset quality improved as noncurrent loans and leases declined for the fourth consecutive quarter but defaulting loans continue to plague the banking industry with noncurrent loans still at levels 500% higher than in 2006.

FDIC Chairman Sheila Bair warned that “The process of repairing bank balance sheets is well along, but is not yet complete.  In addition, housing markets remain weak, in part because of continued questions about mortgage servicing problems. The economic recovery, along with borrower demand, remain sluggish. Longer term, banks may be exposed to interest rate risk when we emerge from this prolonged stretch of unusually low rates.”

The banking industry, while still struggling with nonperforming loans and weak property markets, are further constrained by very weak revenue growth reflected in poor loan demand.  Loans and leases have now fallen for ten out of the past eleven quarters.  The one quarter that reflected loan growth was a statistical fluke due to changes in reporting rules and not actual organic loan growth.

Loan balances declined for more than 70% of all institutions in first quarter 2011.  Total loan balances for the quarter declined by $126.6 billion.

The number of banks on the FDIC Problem Bank List increased again and stands at the highest level since 1993 – see Banking Profile Shows Increase In Problem Banks.

The FDIC Deposit Insurance Fund, while insuring a massive $6.4 trillion in depositor money, shows a negative balance of $1 billion at March 31, 2011.  Ultimately, depositor confidence rests on the FDIC’s $500 billion dollar line of credit from the U.S. Treasury.

Net interest margins remain under pressure for most banks despite the Federal Reserve’s zero interest rate policies.  Interest margins at the country’s largest banks have been in decline since early 2010, but have improved from levels seen prior to the banking crisis.






  1. Keith Beatty says:

    Banks went into the depression with 3% or less capital reserve. ‘Economics’ textbook by Lipsey and Steiner says on page 633 that fractional reserve banks fail without 10% -20% reserves. So they did. Chinese banks today hold $21.5% reserves.

    How much reserve to US banks hold? We know the mortgages they hold are underwater. We know the European PIIGS sovereign debt is worthless. We know California, New York, Illinois sovereign debt is worthless. The full faith and credit of the USA is not worth a tinker’s damn. How much reserve do US banks hold?

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