The banking industry, which was on the verge of collapse in 2008, is showing tenuous signs of recovery. The FDIC Quarterly Banking Profile for the quarter ending June 30, 2012, showed an increase in both bank profits and lending volume as well as a small decline in the number of problem banks.
Almost 63% of all banking institutions reported higher quarterly net income compared to the comparable prior year figures and the number of banks reporting losses declined from 16% to 11%. Return on industry assets from the prior year increased to 0.99% from 0.85%.
Bank lending increased by $102 billion or 1.4% from the prior quarter, representing the the fourth quarterly increase in lending in the last five quarters. Residential mortgage lending rose by $16.6 billion or 0.9%, commercial and industrial lending rose by $48.9 billion or 3.6% and credit card lending rose by $14.7 billion or 2.3%. Lending for real estate construction and development loans declined by $10.9 billion or 4.8% and home equity lending declined by $10.2 billion or 1.7%.
Total net income of the banking industry rose by 21% in the quarter to $34.5 billion from $28.5 billion. Bank earnings have now increased for 12 consecutive quarters although most of the earnings gains were due to gains on sales of loans and assets and lower provisions for loan losses rather than fundamental loan growth. FDIC Acting Chairman Martin Gruenberg said banking industry trends “are consistent with the moderate pace of economic growth” but that “Levels of troubled assets and troubled institutions remain high.”
In order for the banking industry to continue its fragile recovery, organic loan growth based on economic growth is necessary. The “profits recovery” based on lower loan loss reserves can’t continue forever.
In addition to the headwinds faced by banks due to a struggling economy, the banking industry faces a plethora of potential problems that could impede future profit growth including:
- Slow income growth by consumers and a persistently high rate of unemployment
- A deep recession in Europe and a dramatic slowdown in the Chinese economy, both of which could ultimately result in economic shocks to the U.S. economy
- Uncertainty about the potential large tax increases and cuts in federal spending which kick in at the start of next year
- The repression of interest rates by the Federal Reserve has not only robbed savers of interest income but has also resulted in lower earnings for banks as higher interest rate loans are repaid and replaced by lower yielding loans. The net interest margins of banks declined in the second quarter to 3.46% from 3.52% in the previous quarter. With the Federal Reserve promising to keep rates at near zero for the indefinite future, both savers and banks will continue to suffer.
- Both consumers and businesses are reluctant to increase borrowings due to a loss of confidence about future economic recovery.
Loan loss provisions continued to decline in the quarter with banks setting aside $14.2 billion which was 26% lower than the prior year quarter. Charge offs for the quarter totaled $20.5 billion of uncollectible loans, down $8.4 billion or 29% from the prior year’s quarter. The tightening of credit criteria by banks resulted in a reduction, for the ninth consecutive quarter, of loans past due by 90 days or more.
The FDIC Deposit Insurance Fund (DIF) balance increased during the quarter to $22.7 billion, up $7.4 billion from the previous quarter. The DIF fund, which protects banking depositors from losses when banks fail, covers insured deposits of $7.1 trillion. This is equivalent to trying to protect yourself with an umbrella in the middle of a Category 3 hurricane. The collapse of one of the “too big to fail” banks would immediately require the FDIC to seek financial assistance from the U.S. Treasury. During the height of the financial crisis, the FDIC was granted a line of credit with the U.S. Treasury for up to $500 billion.
More than four years after the start of the financial crisis and despite the failure of 454 banks, the number of banks on the FDIC Problem Bank List remains high. Although the number of problem banks declined to 732 from 772 during the quarter ending June 30, 2012, problem banks still account for 10% of all FDIC insured institutions.
The latest Quarterly Banking Profile shows a banking industry struggling to recover from the aftermath of the worst financial crisis since the Great Depression. Whether or not the fragile banking industry recovery continues is anybody’s guess.