A profit letdown for banks in 2019

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WASHINGTON — With net interest income slipping and banks setting aside more reserves to cover losses, the industry's profit fell 1.5% in 2019 to $233.1 billion, the Federal Deposit Insurance Corp. said Tuesday.

The agency's Quarterly Banking Profile said net income in the fourth quarter declined nearly 7% from a year earlier to $55.2 billion, driven by lower net interest income and higher noninterest expenses.

FDIC Chairman Jelena McWilliams noted the decline in short-term interest rates as an obstacle for banks in boosting their asset yields.

“The record-long economic expansion continued into the fourth quarter,” McWilliams said in a statement prepared for the release of the quarterly report. “However, with three reductions in short-term rates during the second half of 2019, challenges in lending and funding persisted.”

The FDIC said the full-year decline in earnings was attributed to a lackluster third and fourth quarters, when net interest income grew more slowly than expected. Net interest income for all of 2019 grew just 1%, and in the fourth quarter actually declined by 2.4% from a year earlier, the first such decline since the third quarter of 2013. The average net interest margin also declined in the fourth quarter, by 20 basis points from a year earlier, to 3.28%.

"The annual decline in NIM occurred for all five asset size groups featured in the Quarterly Banking Profile but was especially pronounced among banks with total assets between $10 billion and $250 billion," the FDIC report said. "Banks responded to the low interest-rate environment by growing longer-term assets, but these assets generated lower yields and contributed to the NIM decline."

The agency reported that nearly half — or 45.6% — of U.S. banks reported a year-over-year decline in net income.

The industry's net charge-offs rose 10.4% from a year earlier to $13.9 billion. The FDIC said the change was driven largely by banks' commercial and industrial portfolios. Credit card charge-offs rose 5% to $409.5 million.

Despite lower net income across the industry, banks' deposits and assets rose from the previous quarter. Assets increased by just under 1%, or $163.4 billion, to $18.6 trillion thanks to growth in loan and lease balances. Banks also increased their holdings in securities by $45.5 billion, or 1.2%.

Among the FDIC’s 5,177 banks, deposits rose 1.8% from the previous quarter, or $258.4 billion, to $14.5 trillion. The total number of FDIC-insured institutions dropped from 5,258 to 5,177. Three banks failed, three banks were added and more than 77 were absorbed through merger, saccording to the FDIC.

Community banks had a better fourth quarter than the rest of the industry, with their net income increasing 4.4% to $6.4 billion, thanks to higher net operating revenue and gains on securities. But the net interest margin for small banks took a hit, falling 5 basis points to 3.67%.

Community banks also pointed to an uptick in payroll expenses as a rising source of non-interest expense. According to the FDIC, benefits and salary rose $716 million, or 8.6%.

Another notable factor weighing down bank profits in 2019 were higher loan-loss provisions — a sign that the nation’s banks may be preparing for rough waters ahead. Provisions for the whole year totaled $55 billion, a nearly 10% increase over 2018.

In the fourth quarter alone, banks increased their loan-loss provisions 5.5% from the previous quarter to $14.8 billion, and over one-third of all banks reported they had set aside more loss reserves.

The FDIC also said loan-loan provisions were 7.3% of net operating revenue during the fourth quarter, the highest level since the fourth quarter of 2012.

Also contributing to the annual decline in quarterly income was a 3.2% increase in noninterest expenses to $121.5 billion. The FDIC said nearly 80% of that increase was linked to a 5.4% increase in salaries and employee benefits. For the whole year, noninterest expenses rose 1.4% to $465.9 billion.

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Earnings FDIC Net interest margin Community banking Interest rates Policymaking Deposits