Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (“FDIC”) reported first-quarter 2015 earnings of $39.8 billion, 6.9% above the year-ago earnings of $37.3 billion. Notably, community banks, constituting roughly 93% of all FDIC-insured institutions, reported net income of $4.9 billion, up 11.9% year over year.
The rise in earnings was led by a $4.3 billion increase in net operating revenue. Increase in trading revenues for banks, including Citigroup Inc. C and JPMorgan Chase & Co. JPM, was the main reason for top-line growth.
Overall, during the first quarter, the banking industry reflected a marked improvement. Also, the number of troubled assets and institutions decreased, which is encouraging. Further, absence of substantial legal expenses acted as a tailwind during the quarter.
Moreover, improvement was recorded in loan and deposit balances. However, a rise in non-interest expenses and pressure on margins was experienced. Also, higher loan loss provision was an undermining factor.
Banks with assets worth more than $10 billion contributed big time to 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. These major banks include Bank of America Corporation BAC, Wells Fargo & Co. WFC and U.S. Bancorp USB.
Performance in Detail
Banks continue to strive for reaping profits, and this, in turn, are bolstering their productivity. Around 62.7% of all institutions insured by the FDIC reported improvement in their quarterly net income, while only 5.6% were unprofitable. This represented the lowest percentage of unprofitable banks since the second quarter of 2005.
The measure for profitability or average return on assets (“ROA”) improved marginally to 1.02% from 1.01% in the prior-year quarter. The average return on equity (“ROE”) increased to 9.12% from 8.99% a year ago.
Net operating revenue was $168.4 billion, up 2.6% year over year. The rise was attributable to an increase in both net interest income and non-interest income.
Net interest income was recorded at $105.7 billion, up 1.5% year over year. The average net interest margin (“NIM”) declined 14 basis points to 3.02%, owing to low interest-rate environment. Moreover, 43.2% banks reported a year-over-year improvement in their NIMs.
Non-interest income grew 4.6% year over year to $62.9 billion for the banks. Notably, revenues from the sale, securitization and servicing of 1-to-4 family residential mortgage loans rose 15.6%, while trading revenues improved 23.9%. Around 57.3% of all banks reported a rise in non-interest income as compared with the prior-year quarter.
Total non-interest expense for establishments was $103.5 billion in the quarter, up 1.2% on a year-over-year basis.
Credit Quality
Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs fell 13.2% to $9.0 billion. Notably, all major loan groups recorded a year-over-year decline in charge-offs.
The level of non-current loans and leases (those 90 days or more past due or in non-accrual status) declined 21.6% year over year to $153 billion. Moreover, the percentage of non-current loans and leases fell to 1.83%, reflecting a 7-year low.
In the quarter, provisions for loan losses for the institutions came in at $8.4 billion, up 9.9% year over year. The reported figure represents a rise in provisions for the third consecutive quarter.
Capital Position
The capital position of banks remained strong. Total deposits continued to rise and were recorded at $12.0 trillion, up 5.7% year over year. Further, total loans and leases came in at $8.4 trillion, up 5.4% year over year.
As of Mar 31, 2015, the Deposit Insurance Fund (“DIF”) balance increased 4% year over year to $65.3 billion. Interest earned on investment securities primarily drove the growth in fund balance.
Further, new regulatory capital rules that took effect during the reported quarter included the Common Equity Tier 1 (CET1) capital ratio. As of Mar 31, 2015, average CET1 ratio was 12.65%.
Bank Failures and Problem Institutions
During the first quarter of 2015, four insured institutions failed. As of Mar 31, 2015, the number of "problem" banks declined from 411 to 253, reflecting the 16th consecutive quarter of decrease. Total assets of the "problem" institutions also fell to $60.3 billion from $126.1 billion in the year-ago quarter.
Our Viewpoint
Though decline in the number of problem institutions is encouraging, the quarter remained challenging as uncertainty over top-line growth persists due to prevalent pressure on NIMs from a nagging low rate environment.
Nonetheless, 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. Further, an encouraging equity and asset market backdrop, along with favorable macroeconomic factors – such as falling unemployment rate, a progressive housing sector and flexible monetary policy – should pave the way for stability.
At the same time, we are encouraged to see that increased legal and regulatory pressure are driving the point home for the U.S. banks, which are now resorting to safer alternatives to stay afloat. This indicates their ability to better encounter challenges and grow at a moderate pace.
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