FDIC-Insured Banks' Q2 Earnings Impressive, Costs Escalate

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported second-quarter 2019 earnings of $62.6 billion, up 4.1% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6.9 billion, up 8.1%.

Banks’ earnings were supported by higher net interest income in the June-end quarter. Further, rise in loans and net interest margin were tailwinds. Moreover, decline in the number of ‘problem banks’ was a positive. Nonetheless, elevated provisions, high expenses and fall in fee income were undermining factors.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the second quarter. Though such banks constitute only 1.8% of the total number of domestic banks, these accounted for approximately 80% of the industry’s earnings. Leading names in this space include JPMorgan JPM, Bank of America BAC, Citigroup C and Wells Fargo WFC).

All the above-mentioned banks carry a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Net Operating Revenues & Margin Improve, Costs Up

Banks have been striving to boost productivity and generate higher profits. Around 60% of all FDIC-insured institutions reported improvement in quarterly net income, while the remaining witnessed a decline from the prior-year quarter level. Additionally, the percentage of institutions reporting net losses in the quarter edged down below 4%.

As of Jun 30, 2019, the measure for profitability or average return on assets inched up to 1.38% from the 1.37% recorded as of Jun 30, 2018.

Net operating revenues came in at $205.2 billion, up 1.5% year over year. A rise in net interest income, partly offset by lower non-interest income, was the driving factor.

Net interest income was $139 billion, up 3.7% year over year, aided by marginal growth in interest-bearing assets and elevated net interest margins (NIM). Notably, around 75% of banks witnessed rise in net interest income.

NIM inched up to 3.39% from the 3.38% recorded in the year-earlier quarter.

Non-interest income for the banks declined 2.7% year over year to $66.2 billion. This downside resulted from lower servicing income and investment banking income, partly mitigated by higher trading and other non-interest income.

Total non-interest expenses for the establishments were $115.1 billion in the April-June quarter, up 1.4% on a year-over-year basis due to rise in salary and employee-benefit expenses.

Credit Quality: A Mixed Bag

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $12.8 billion, up 9.3% year over year. Notably, higher credit card, together with commercial and industrial charge-offs, aided this upside.

In the June-end quarter, provisions for loan losses for the institutions were $12.8 billion, up 9.3% year over year. The level of non-current loans and leases declined 8.7% to $95.7 billion. The non-current rate was 0.93%.

Strong Loan & Deposit Growth

Capital position of banks remained solid. Total deposits continued to rise and were $14 trillion, up 4.2% year over year. Additionally, total loans and leases were $10.3 trillion, jumping 4.5%.

As of Jun 30, 2019, the Deposit Insurance Fund balance increased to $107.4 billion from $97.6 billion as of Jun 30, 2018. Furthermore, interest earned on investment securities primarily supported growth in fund balance, partly muted by lower assessment income.

Low Bank Failures, Shrinking ‘Problem’ Institutions, New Charters Added

During the April-June period, one of the banks failed, five new charters were added, while 60 were merged. As of June 30, 2019, the number of ‘problem’ banks declined from 59 to 56. This signifies the lowest number reported since first-quarter 2007. Total assets of the ‘problem’ institutions increased to $48.5 billion from $46.7 billion reported in the previous quarter.

Our Viewpoint

Fall in the number of ‘problem’ institutions looks encouraging, with the second quarter registering top-line growth on higher net interest income. Banks have been gradually easing their lending standards and trending toward higher fees to counter pressure on the top line.

Though the recent interest-rate cut and inversion of the yield curve might impact lending scenario, banks need to maintain their underwriting standards, along with cautious risk management, to sail through the existing economic cycle. However, rise in expenses was on the downside which needs to be controlled to keep the profits up.

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