Federal Deposit Insurance Corporation (FDIC) insured
commercial banks and savings institutions reported third-quarter
2013 earnings of $36.0 billion, lagging the year-ago earnings of
$37.5 billion by 3.9%. This is the first time since the second
quarter of 2009, that earnings have declined on a year-over-year
Though higher litigation expenses recorded by a major bank led to
the overall earnings decline, the banking industry is witnessing
a gradual improvement. The number of troubled assets and
institutions had a marked fall, which is encouraging.
Further, reduction in loan loss provisions was a tailwind. On the
flip side, net operating revenue declined due to lower mortgage
activity and higher expenses.
Banks with assets worth more than $10 billion contributed a major
part of the earnings in the said quarter. Though such banks
constitute merely 1.5% of the total number of U.S. banks, these
account for approximately 82% of the industry earnings.
Such major banks include
Wells Fargo & Company
The PNC Financial Services Group, Inc.
Bank of America Corporation
Performance in Detail
Banks are striving to reap profits and are consequently
bolstering their productivity. Around 50% of all institutions
insured by the FDIC reported improvement in their quarterly net
income, while the remaining number recorded a decline in
comparison to the prior-year quarter. Moreover, the percentage of
institutions reporting net losses for the quarter slumped to 8.6%
from 10.7% in the last-year quarter.
The measure for profitability or average return on assets (ROA)
fell to 0.99% from 1.06% in the prior-year quarter. The average
return on equity (ROE) decreased to 8.92% from 9.35%.
Net operating revenue was $163.3 billion, down 3.6% year over
year. The decrease was due to a fall in non-interest income as
well as net interest income.
Net interest income was recorded at $104.3 billion, down 1.3%
year over year. The fall in net interest income was due to
interest income from loans and other investments declining faster
than interest expense on deposits and other liabilities. The
average net interest margin declined to 3.26% from 3.42% in the
Non-interest income declined 7.4% year over year to $59 billion
for the banks. Notably, income from sale, securitization and
servicing of 1-to-4 family mortgage loans at major mortgage
lenders suffered a fall. Further, net gains on sales of loans
decreased 52.6% year over year.
Total non-interest expenses for the institutions were $106.5
billion in the quarter, 1.9% higher on a year-over-year basis.
The rise was primarily due to higher litigation expenses in the
Overall, credit quality considerably improved in the reported
quarter. Net charge-offs fell to $11.7 billion from $22.2 billion
in the third quarter of 2012. Notably, all major loan groups
recorded a year-over-year decline in charge-offs.
In the quarter, provisions for loan losses for the institutions
came in at $5.8 billion, down 60.4% year over year. The reported
figure was the lowest quarterly loss provision since the third
quarter of 1999.
The level of non-current loans and leases (those 90 days or more
past due or in non-accrual status) declined 7.7% sequentially.
Moreover, the percentage of non-current loans and leases fell to
2.83%, which was the lowest since third quarter of 2008.
The capital position of the banks was strong. Total deposits
continued to rise and were recorded at $11 trillion, up 4.8% year
over year. Further, total loans and leases came in at $7.8
trillion, up 2.6% year over year.
As of Sep 30, 2013, the Deposit Insurance Fund (DIF) balance
increased to $40.8 billion from $37.9 billion as of Jun 30, 2013.
Moreover, assessment revenues and lower estimated losses from
expected failures primarily drove growth in fund balance.
Bank Failures and Problem Institutions
During the third quarter of 2013, 6 insured institutions failed,
down from 12 failures in the prior-year quarter. Moreover, as of
Sep 30, 2013, 23 failures were recorded, as against 50 failures
in the comparable prior-year period.
As of Sep 30, 2013, the number of "problem" banks declined from
553 to 515, reflecting the tenth consecutive quarter of decrease.
Total assets of the "problem" institutions also fell to $174.2
billion from $192.5 billion.
Though decline in the number of problem institutions is
encouraging, higher litigation expenses limited earnings growth
in the quarter. Now that the interest rate environment has
been turning around with rising medium- and long-term interest
rates, revenues from mortgage fees lessened as the boom in
mortgage refinancing fizzled out.
Top-line growth remains uncertain due to continued sluggishness
in loan growth and less flexible business models owing to
stringent risk-weighted capital requirements (Basel III
Eventually, banks will have to take resort to cost containment
through job cuts and reduced size of operations to stay afloat.
Already, the industry has witnessed more than half a million
layoffs over the last five years.
Continuous expense control, sound balance sheets and lesser
credit loss provisions are considered to be the key growth
drivers. Moreover, a favorable equity and asset market backdrop,
reduced unemployment, a progressive housing sector and flexible
monetary policy are expected to boost earnings.
It is commendable to see U.S. banks taking legal and regulatory
pressure in their stride, indicating their ability to overcome
challenges. However, with lingering uncertainty in the economy,
the sector is not expected to return to its pre-recession peak
Overall, structural changes in the sector will continue to impair
business expansion and investor confidence. Several dampening
factors - asset-quality troubles, mortgage liabilities and
tighter regulations - will decide the fate of the U.S. banks in
the quarters ahead. However, entering the new capital regime is
expected to ensure long-term stability and security for the
BANK OF AMER CP (BAC): Free Stock Analysis
PNC FINL SVC CP (PNC): Free Stock Analysis
US BANCORP (USB): Free Stock Analysis Report
WELLS FARGO-NEW (WFC): Free Stock Analysis
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