WASHINGTON — After a string of quarters pulling back from risk and relying on lower loss provisions for profits, banks are finally signaling the time is right to grow again.
The Federal Deposit Insurance Corp.'s fourth-quarter earnings report showed lower provisions are still the main earnings driver, and declines in noninterest income and margins are still squeezing revenues. Yet after imploring banks for successive quarters to renew lending, the FDIC said last quarter registered the "largest real growth" in loans in four years.
The $130 billion in lending growth last quarter, largely due to more business loan demand, was the highest such increase since loans grew by just over $200 billion in late 2007. Total loans last quarter rose 1.8% — compared with the previous quarter — to $7.46 trillion.
"Prudent loan growth is a necessary condition for a stronger economy. That is why we view the fourth quarter growth in the industry's loan portfolio as a hopeful sign," said acting FDIC Chairman Martin Gruenberg at the release of the Quarterly Banking Profile.
Overall, institutions earned $26.3 billion last quarter. While the performance was a seasonal drop-off from the $35.3 billion in the third quarter, the industry finished off 2011 with a quarterly profit 23% higher than a year earlier — its 10th year-over-year increase. Full-year income registered at just under $120 billion, a 40% increase from 2010 and the industry's first profit over $100 billion since 2006. More than 63% of institutions had higher quarterly net income than a year earlier.
Yet despite continued profit and encouraging credit signs, banks still showed many of the characteristics of a pullback that defined prior quarters. The 7.4% decrease in noninterest income — compared with a year earlier — to $54.9 billion, as well as the 12-basis point lower net interest margin of 3.57%, helped pull net operating revenue down 2.3% to $162 billion. And the 40% lower provisions from a year earlier — to $19.5 billion — were still the saving grace. Over half of all institutions had lower provisions than a year earlier.
"Bank revenues have been flat in an environment of low interest rates and slack loan demand," Gruenberg said.
Still, following other recent quarters of modest if not weak lending activity, Gruenberg pointed to the "recent resumption in loan growth" as helping to "limit the erosion in net operating revenue."
"In the current environment of low short-term interest rates and a relatively flat yield curve, prudent loan growth offers the best hope for increasing net income," he said.
Indeed, boosting their volume, banks were able to manage their first year-over-year growth in net interest income — 0.6% to $107 billion — in four quarters. (Net interest income for the year was down 1.7% from 2010, to $422 billion, the first such decline since 1971.)
The commercial and industrial sector was credited with driving the new loan growth. C&I loans, which grew during the quarter by nearly $63 billion — or $4.9% — to $1.35 trillion, accounted for almost half of the total loan increase. While FDIC officials pointed to middle-market firms as being the most interested in new business loans, the agency found that small C&I loans — those of $1 million or less — registered their first increase in the seven quarters that such data have been available.
"The pickup you're seeing in commercial and industrial lending is a reflection of increased loan demand. … We're hopeful that's going to continue to increase and will actually expand to other kinds of credits," Gruenberg said.
Residential mortgages increased by $26 billion — or by 1.4% – to $1.88 trillion, followed by a $21.3 billion — or 3.2% — increase in credit card balances to $688 billion. Real estate construction and development loans fell $14.7 billion — or 5.8% — to $240 billion, the 15th straight quarterly decline.
Officials said as the business sector has shown interest in hiring and expanding, the persistent trouble in housing and other real estate is still a drag on real estate lending categories.
"More than half of the loan book of FDIC-insured institutions is real estate-secured," said Richard Brown, the FDIC's chief economist. "In areas like construction and development lending, we see continued rapid contraction in those portfolios and very high noncurrent rates. We're not going to see any improvement there until those projects are worked out."
On housing, Brown added, "It's very difficult still."
"There is still a backlog of foreclosures. There is still pressure from distressed sales on that market," he said. "As of right now, there is not a lot of basis for expansion in those lending categories."
Meanwhile, in a further sign of the industry shedding its bad assets from the crisis, net charge-offs fell to their lowest level since early 2008, dropping 40% compared with a year earlier to $25.4 billion. Credit card charge-offs led the decline, falling by 42% — or $5.4 billion — to $7.4 billion. Noncurrent loans fell for the seventh straight quarter, dropping by 1.4% to $305 billion.
The report showed the FDIC is making progress in rebuilding the Deposit Insurance Fund, which stemming from sharp increases in failures had been in the red between late 2009 and early 2011. The fund finished 2011 with $9.24 billion — registering the third straight quarter in the black. With insured deposits continuing to climb — rising 3% in the quarter to $6.98 trillion — the fund's ratio of reserves to insured deposits grew by just one basis point to 0.13%.
Acknowledging banks' interest in whether a growing fund means smaller FDIC premiums, Gruenberg said the agency still has a long road to hitting a congressionally-mandated reserve ratio of 1.35%. (The Dodd-Frank Act requires the FDIC to reach that level by 2020.)
"The answer is that although we've moved … into the black, we really have a significant way to go to reach the statutorily-required reserve ratio of 1.35%," he said. "The good news is that deposit insurance premiums shouldn't be rising. But they're also not likely to decline for awhile."
The QBP said the FDIC's "Problem List" of troubled institutions had shrunk by 31 institutions to 813. Assets of institutions on the list fell by $19.6 billion to $319.4 billion.