Q3 Bank Earnings Improve Amid Concerns Over Lending Conditions

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $47.9 billion in Q3/17, up $2.4 billion (5.2%) from a year earlier.

The increase in earnings was mainly attributable to an $8.8 billion (7.4%) increase in net interest income.

Of the 5,737 insured institutions reporting third quarter financial results, 67.3% reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable in the third quarter fell to 3.9% from 4.6% a year earlier.

“Third quarter results for the banking industry were largely positive,” FDIC Chairman Martin J. Gruenberg said. “Revenue and net income were higher at most banks, net interest margin improvement was widespread, and the number of unprofitable banks and ‘problem banks’ continued to fall. Community banks also reported another solid quarter of revenue, net income and loan growth.

“While the quarterly results were largely favorable, the industry continued to see a gradual slowdown in the annual rate of loan growth. In addition, the operating environment for banks remains challenging. An extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield. This has led to heightened exposure to interest-rate risk, liquidity risk and credit risk. These risks must be managed prudently for the industry to continue to grow on a long-run, sustainable path.”

Highlights from Q3/17

  • Quarterly earnings were $2.4 billion (5.2%) higher than in Q3/16 due to relatively strong growth in net interest income and limited growth in operating expenses.
  • The average return on assets rose to 1.12%, from 1.10% in Q3/16. More than two-thirds of all banks — 67.3% — reported higher quarterly earnings than a year earlier.
  • The percentage of banks reporting net losses for the quarter fell to 3.9%, from 4.6% in Q3/16.
  • Net interest income totaled $127.5 billion, an increase of $8.8 billion (7.4%) from a year earlier. More than 80% of all banks reported higher net interest income than in the prior year. The average net interest margin rose to 3.30%, from 3.18% a year earlier. This is the highest average net interest margin for the industry since Q4/12. Total noninterest income was $639 million (1%) lower than a year earlier.
  • The 5,294 insured institutions identified as community banks reported $6 billion in net income in the third quarter, up $513 million or 9.4% from the prior year. Net operating revenue was $1.5 billion (6.7%) higher, as net interest income was up $1.7 billion (9.7%).
  • Noninterest income declined $174.2 million (3.4%). Loan-loss provisions increased $39.8 million (5.5%), while noninterest expenses were $631.7 million (4.3%) higher.
  • Total loans and leases increased $96.2 billion during Q3/17. Loan and lease balances increased 1% during the three months ended September 30. All major loan categories registered growth during the third quarter. Residential mortgage loans increased $20.5 billion (1%) from the prior quarter, credit card balances rose $15.7 billion (2%), and loans to finance nonfarm nonresidential real estate grew $12.1 billion (0.8%). For the 12 months ended September 30, loan and lease balances rose $321.6 billion (3.5%).
  • Noncurrent loan balances declined while net charge-offs increased. The amount of loans that were noncurrent — 90 days or more past due or in nonaccrual status — declined $2.1 billion (1.8%) during Q3/17. Noncurrent balances fell in residential mortgages and in commercial and industrial loans, but increased in credit cards and other consumer loan categories. The average noncurrent loan rate fell from 1.23% to 1.20% during the quarter. This is the lowest noncurrent rate since Q3/07. Net charge-offs were $813 million (8%) higher than a year ago, as the average net charge-off rate rose from 0.44% to 0.46%.

The FDIC’s problem bank list fell from 105 to 104 during Q3/17. This is the smallest number of problem banks since the first quarter of 2008, and is almost 90% less than the post-crisis peak of 888 in Q1/11. Total assets of problem banks fell from $17.2 billion to $16.0 billion during the quarter.

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