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FDIC-Insured Banks Report Solid Q3 Earnings on High Revenues

Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported third-quarter 2015 earnings of $40.4 billion, up 5.1% year over year. Notably, community banks constituting 93% of all FDIC-insured institutions, reported net income of $5.2 billion, up 7.5% year over year.

Overall, during the third quarter, the banking industry witnessed a gradual improvement. The number of troubled assets and institutions dipped significantly, which is encouraging.

Further, organic growth aided by higher revenues, improved loan and deposit balances was recorded. Moreover, lower expenses and uptrend in profitability metrics were the positives. However, persistent pressure on margins was experienced.

Banks with assets worth more than $10 billion contributed a major part of the earnings in the said quarter. Though such banks constitute merely 1.6% of the total number of U.S. banks, these accounted for approximately 80% of industry earnings. Such major banks include Wells Fargo & Co. WFC , Bank of America Corporation BAC , Citigroup Inc. C and U.S. Bancorp USB .

Performance in Detail

Banks are persistently striving to reap profits and are consequently bolstering their productivity. Around 58.9% of all institutions insured by the FDIC reported improvement in their quarterly net income, while the remaining recorded a decline in comparison to the prior-year quarter. Moreover, the percentage of institutions reporting net losses for the quarter slumped to 5% from 6.6% in the last-year quarter. Notably, the percentage was the lowest since first-quarter 2005.

The measure for profitability or average return on assets (ROA) increased to 1.02% from 1.01% in the prior-year quarter.

Net operating revenue was $172.9 billion, slightly up on a year-over-year basis. Rise in net interest income was almost offset by lower non-interest income.

Net interest income was recorded at $108.7 billion, up 1.7% year over year. The average net interest margin declined to 3.08% from 3.15% in the prior-year quarter.

Non-interest income declined 2% year over year to $63.3 billion for the banks. Notably, lower servicing income, trading revenue and reduced gains from loan sales attributed to the decline.

Total non-interest expenses for the establishments were $105.6 billion in the quarter, down 2.9% on a year-over-year basis. Lower litigation expenses, reduced charges for goodwill impairment and salaries and employee benefits expenses mainly aided the fall.

Credit Quality

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs fell to $8.7 billion, down 6.2% year over year. Notably, all major loan groups recorded a year-over-year decline in charge-offs except commercial and industrial (C&I) loans.

In the quarter, provisions for loan losses for the institutions came in at $8.5 billion, up 17.9% year over year. The level of non-current loans and leases (those 90 days or more past due or in non-accrual status) declined 19.1% year over year to $139.2 billion, reflecting the 22nd consecutive quarterly decline in non-current loan balances.

Balance Sheet

The capital position of the banks was strong. Total deposits continued to rise and were recorded at $12 trillion, up 3.4% year over year. Further, total loans and leases came in at $8.6 trillion, up 5.9% year over year.

As of Sep 30, 2015, the Deposit Insurance Fund (DIF) balance increased to $70.1 billion from $54.3 billion as of Sep 30, 2014. Moreover, interest earned on investment securities and assessment income primarily led to the growth in fund balance.

Bank Failures and Problem Institutions

During the third quarter of 2015, one insured institution failed. As of Sep 30, 2015, the number of "problem" banks declined from 228 to 203, reflecting the lowest number in approximately the last 7 years and significantly decreased from the high level of 888 in the first-quarter 2011. Total assets of the "problem" institutions also fell to $51.1 billion from $56.5 billion.

Our Viewpoint

Though a decline in the number of problem institutions is encouraging, the quarter remained challenging with sluggish mortgage banking activities and legal costs. Moreover, uncertainty regarding top-line growth persists as pressure on net interest margins from a nagging low rate environment prevails.

However, banks have been gradually easing their lending standards and trending toward higher fees to dodge the pressure on the top line. Then again, continued expense control and stable balance sheets should act as tailwinds in the upcoming quarters.

With lingering uncertainty in the economy, we do not see this issue-ridden sector returning to its pre-recession peak anytime soon. What encourages us though is that the U.S. banks are getting accustomed to increased legal and regulatory pressure and hence resorting to safer alternatives for higher earnings. This indicates their ability to better encounter challenges and grow at a moderate pace.

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US BANCORP (USB): Free Stock Analysis Report

WELLS FARGO-NEW (WFC): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

BANK OF AMER CP (BAC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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