‘Another unprecedented period’: FDIC reports dramatic 1Q profit drop

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WASHINGTON — Banking industry profits were walloped in the first quarter of 2020 as the coronavirus pandemic took an immediate toll on the economy, the Federal Deposit Insurance Corp. said Tuesday.

The FDIC’s Quarterly Banking Profile paints a dour picture for the U.S. banking sector during the three months that ended March 31. The virus outbreak took hold in March and banks finished the quarter with $18.5 billion in net income, a precipitous fall of 69.6% compared with the year-earlier period. The pain was widespread; the FDIC said more than half of all banks reported a decline in annual net income.

“The FDIC was born out of a crisis, and we now find ourselves in the midst of another unprecedented period,” FDIC Chairman Jelena McWilliams said in a statement accompanying the report. She cited the pandemic and its “attendant economic downturn," which resulted in a 5% drop in GDP during the first quarter that "adversely affected several industry sectors and financial markets.”

A big driver of the profit decline was a dramatic increase in reserves banks set aside to prepare for future losses. Citing “deteriorating economic conditions” as well as the implementation by some banks of the Current Expected Credit Losses accounting methodology, the FDIC reported that provisions for credit losses increased by $38.8 billion to a total of $52.7 billion, an increase of nearly 280% from a year earlier.

McWilliams stressed that she believes the nation’s banks remain a source of strength for the economy, given their continued role in working with customers affected by the pandemic. “Although bank earnings were negatively affected by increases in loan-loss provisions, banks effectively supported individuals and businesses during this downturn through lending and other critical financial services,” she said.

The FDIC’s report is one of the most comprehensive looks at how the financial sector has been affected by the pandemic. However, since it covers a quarter that ended in March, the report captures only a sliver of the impact of the COVID-19 crisis. Three months later, public health experts warn that the crisis is far from over, even though several regional economies around the country are steadily reopening.

Net charge-offs also surged in the first quarter of 2020, rising nearly 15% from a year earlier to $14.6 billion. More than two-thirds of those new charge-offs were tied to commercial and industrial loans; C&I loan charge-offs rose by 87%.

However, banks’ assets exploded in the first quarter of 2020, largely driven by cash and balances due from depository institutions. In just one quarter total assets grew by $1.6 trillion, an increase of 8.6%. Deposits grew by $1.2 trillion, or 8.5%.

Meanwhile, net interest income fell 1.4%, compared with the same period last year, to $137.3 billion. The first quarter of 2020 marked the second consecutive quarter of an industry decline in interest income. The average net interest margin declined 29 basis points to 3.13% as “asset yields falling more rapidly than funding costs.”

The FDIC noted that the rate of noncurrent loans held relatively steady at 0.93%. Those loans, however, only include credits that are at least 90 days past due, and wouldn’t necessarily reflect the borrowers who started struggling at the very beginning of the pandemic.

Still, the FDIC reported a $7 billion increase in noncurrent loan balances from the previous quarter, or a 7.3% increase, and nearly half of all banks reported a quarterly increase in noncurrent balances. Like net charge-offs, that increase was also driven by mounting balances in commercial and industrial loan portfolios — an increase of $3.6 billion, or 20.7%.

On the whole, community banks fared better than their larger peers in the first quarter of the year but weathered notable headwinds. Net income dropped by nearly 21%, to $4.8 billion, compared to the same period in 2019. The FDIC attributed the decline to higher loan-loss provisions among smaller banks.

Net interest income was more encouraging for community banks, rising 2.1% from a year earlier, although the average net interest margin declined 12 basis points to 3.55%. Overall, net operating revenue for community banks increased 4.1% to $23 billion.

In a teleconference with reporters, McWilliams said it is too soon for lenders to stop providing flexibility to their borrowers who have been hit economically by the pandemic.

“There has been a shock to the economy; it’s reflected in the numbers,” McWilliams said. “The issue with crises like this is that usually, they take a few quarters to fully play out.”

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FDIC Earnings Loan-loss provisions CECL Coronavirus Jelena McWilliams