Banks Getting Healthier

Bank earnings rose to their highest level in more than four years, while the number of troubled banks declined for the second consecutive quarter.  The Federal Deposit Insurance Corporation (FDIC) said the banking industry earned $35.3 billion in the 3rd quarter, an increase from the $23.8 billion reported in the same timeframe last year.  More than 60 percent of banks reported improved earnings.  According to the FDIC, there currently are 844 banks on its confidential “problem”, or roughly 11.5 percent of all federally insured banks.  That was down from 865 between April and June, and was first quarter in five years to show a decline.

“After three years of shrinking loan portfolios, any loan growth is positive news for the industry and the economy,” said Martin Gruenberg, FDIC’s acting chairman.  Lending has not yet reached healthy levels.  So far in 2011, 90 banks have failed.  That’s a significant improvement over the 157 banks that were shuttered last year — the most for one year since the darkest days of the 1992 savings and loan crisis — and the 140 in 2009.

The FDIC’s so-called problem bank list consists of the institutions considered most likely to fail, though few actually are shuttered.  Only 26 of the nation’s 7,436 banks failed in the 3rd quarter, 15 fewer than the same period of 2010.  “The trend has been improving, but the current number of failures and problem institutions remains high by historical standards,” Gruenberg said.

Banks whose assets exceed $10 billion drove of the earnings growth. They account for just 1.4 percent of all banks but accounted for about $29.8 billion of the industry’s earnings in the 3rd quarter.  Those are the biggest banks, such as Bank of America, Citigroup, JPMorgan Chase and Wells Fargo.  The majority of these banks have recovered with help from federal bailout money and record-low borrowing rates.

Writing on MarketWatch, Ronald D. Orol says that “It is unclear whether the reduction in troubled banks on the list is a result of institutional failures or improvements.  In the 3rd quarter there were 26 bank failures and 21 banks dropped off the problem bank list.  In the 2nd quarter there were 22 bank failures and 23 banks came off the problem bank list.  It is possible that a bank fails so fast that it is never on the problem list.  FDIC-insured institutions posted net income of $35.3 billion in the 3rd quarter, an increase of $11.5 billion, or 48 percent, compared to a year earlier.  The profits were at the highest level since the 2nd quarter of 2007, the FDIC said.  However, Martin Gruenberg said that even though the industry is generally profitable, the recovery is ‘by no means’ complete.  He noted that a central concern for the agency is whether banks can generate income from a greater demand for loans, something that is still lacking.  He said that the industry has seen income gains generated from improvements in credit quality and the ability to reduce loss provisions but that to really generate income and revenue, funding for loans is going to have to expand and that ‘depends on the overall economy.’  The key issue is going to be whether there can be a pick up in economic activity and generate demand for loans.  Ongoing distress in real-estate markets and slow growth in jobs and incomes still pose a threat to bank credit quality.”

The majority of banks that have struggled or failed have been small or regional institutions.  They rely a lot on commercial property and development loans, sectors that have lost a lot of money.  As companies closed during the recession, they vacated shopping malls and office buildings financed by those loans.  Nevertheless, large banks are less profitable than they were before the financial crisis hit in the fall of 2008, leading to some sizable layoffs.  Some credit rating agencies have been warning that the European debt crisis could hit the largest American banks.  Financial companies’ stocks have been especially beat up in the stock market’s volatility in recent months.

“We continue to see income growth that reflects improving asset quality and lower loss provisions,” Gruenberg said.  “U.S. banks have come a long way from the depths of the financial crisis.  Bank balance sheets are strong in a number of ways, and the industry is generally profitable, but the recovery is by no means complete.”  The banking industry also saw a 0.5 percent rise in net operating revenue compared with 2010, thanks in part to a $3.2 billion — or 5.8 percent — increase in non-interest income, the first year-over-year increase in nearly two years.  “Absent these unrealized gains, net operating revenue would have posted a year-over-year decline for a third consecutive quarter,” Gruenberg concluded.