Federal Deposit Insurance Corporation (FDIC)-insured
commercial banks and savings institutions reported second-quarter
2013 earnings of $42.2 billion, outpacing the year-ago earnings
of $34.4 billion by 22.6%. This marks the 16th consecutive
quarter in which earnings soared on a year-over-year basis.
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Overall, the banking industry is exhibiting signs of gradual
improvement as evident from the second-quarter results. The
number of troubled assets and institutions marked a decline and
are striving to improve.
Further, reduced loan loss provisions and higher non-interest
income were the primary drivers for the record earnings posted by
the banks. Lower non-interest expenses reflect prudent expense
management by the banks. However, these positives were partially
offset by reduced net interest income, reflecting lower margins
and meek loan growth.
Banks with assets worth more than $10 billion contributed to the
overall earnings growth during the second quarter. Though these
constitute only 1.5% of the total U.S. banks, the banks account
for approximately 82% of the industry earnings.
Such major banks include
Wells Fargo & Company
JPMorgan Chase & Co.
Bank of America Corporation
Performance in Detail
Banks are striving hard to be profitable and are bolstering their
Around 53.8% of all institutions insured by the FDIC reported
improvement in their quarterly net income compared to the
prior-year quarter. Moreover, shares of institutions reporting
net losses for the quarter slumped to 8.2% from 11.3% in the
The profitability measure - average return on assets (ROA) surged
to 1.17% from 0.99% in the prior-year quarter. Notably, the
current quarterly ROA for the industry is the highest since 1.22%
recorded in the second quarter of 2007.
Net operating revenue stood at $170.6 billion, up 3% year over
year. The increase was due to a rise in non-interest income,
partially offset by lower net interest income.
Net interest income was recorded at $103.7 billion, down 1.7%
year over year, reflecting the third consecutive quarter of
decline. 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 3.45% in
the prior-year quarter, as average asset yields were less than
the average funding costs.
Non-interest income rose 11.1% year over year to $66.9 billion
for the banks. Moreover, trading income more than tripled from
the year-ago quarter, in which net loss on credit derivatives was
reported. Further, net gains on sales of loans and other assets
jumped 63.7% year over year.
Total non-interest expenses for the institutions were $102
billion in the quarter, down 1.4% on a year-over-year basis. The
decline was aided by lower other non-interest expenses and
reduced premises and equipment expenses, partially offset by
higher salaries and employee benefits expenses.
Overall, credit quality marked an improvement in the second
quarter of 2013. Net charge-offs plummeted to $14.2 billion from
$20.5 billion in the second quarter of 2012. The decline was
primarily due to lower charge-offs in residential real estate
Provisions for loan losses for the institutions in the reported
quarter were recorded at $8.6 billion, down 39.6% year over year,
reflecting the lowest quarterly loss provision since the third
quarter of 2006.
The level of non-current loans and leases (those 90 days or more
past due or in non-accrual status) declined 8.3% year over year.
Moreover, the percentage of non-current loans and leases declined
to 3.09%, the lowest level since 2008.
The banks exhibited a strong capital position. Total deposits
continued to rise and were recorded at $10.8 trillion, up 4.9%
year over year. Further, total loans and leases came in at $7.7
trillion, up 2.7% year over year.
As of Jun 30, 2013, the net worth of Deposit Insurance Fund (DIF)
increased to $37.9 billion, up from $35.7 billion as of Mar 31,
2013. Moreover, assessment revenues primarily impelled growth in
the fund balance.
Bank Failures and Problem Institutions
During the second quarter of 2013, 12 insured institutions
failed, up from 4 failures in the prior quarter. Moreover, as of
Jun 30, 2013, 20 failures were recorded, as compared with 40
failures in the comparable prior-year period.
As of Jun 30, 2013, the number of "problem" banks declined from
612 to 553, reflecting the ninth consecutive quarter of decrease.
Total assets of the "problem" institutions also plummeted to
$192.5 billion from $213.3 billion.
Besides the encouraging decline in the list of problem
institutions, the 16th straight quarter of consolidated profit
from FDIC-insured banks is quite impressive. U.S. banks are
showing signs of strength despite being compelled to meet strict
regulatory standards. Though it is too early to be confident
about the sector's growth prospects, the progress seen in the
first half of 2013 indicates a brighter future for the banks that
are less dependent on risky activities and resort to other
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,
falling unemployment, a progressive housing sector and flexible
monetary policy have contributed significantly to the
Yet, top-line growth remains uncertain due to continued
sluggishness in loan growth, pressure on net interest margins
from the sustained low rate environment and less flexible
business models owing to stringent risk-weighted capital
requirements (Basel III standards). Now that the interest rate
environment is turning around, net interest margins are likely to
improve and support the top line significantly. However, revenues
from mortgage fees are expected to lessen as the boom in mortgage
refinancing fizzles out.
However, it is impressive to observe that U.S. banks are taking
legal and regulatory pressure in their stride, indicating their
ability to encounter impending challenges. But with the economy
in disarray, we do not envision the sector returning to its
pre-recession peak anytime soon.
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