WASHINGTON — Bank earnings leaped to $44 billion in the first quarter, a 12.7% increase from a year earlier, a trend driven by growth in both net interest and noninterest income, according to a report issued Wednesday by the Federal Deposit Insurance Corp.
Despite the boost in earnings, however, banks remained wary of lending, with loan growth marking its first quarterly slowdown since 2013.
“This was another largely positive quarter for the banking industry,” said FDIC Chairman Martin Gruenberg in remarks prepared for delivery, citing positive trends in quarterly revenue and net income growth, as well as asset quality. “However, loan growth has slowed for the industry in the past two quarters as the economy approaches the end of the eighth year of an expansion marked by modest growth.”
In many ways, the FDIC’s Quarterly Banking Profile for the first quarter described a robust industry. Net operating revenue rose to $183.6 billion, a 6.3% increase compared to the same period last year. And more than two out of three banks reported year-over-year growth in net operating revenue.
Noninterest income increased 3.4%, or $2.1 billion, which included a 220.6% increase in servicing income. Meanwhile, net interest income also rose by 7.8%, or $8.8 billion, and interest-bearing assets increased by 4.9%. The average net interest margin rose to 3.19%, from 3.10% a year earlier.
Another sign of the robustness of the industry were the growing reserves banks set aside. The reserve coverage ratio – which measures loan-loss reserves relative to total noncurrent loan balances – exceeded 97% in the first quarter, a record not reached since 2007.
“The industry’s capacity to absorb credit losses continues to improve,” said Gruenberg.
Noncurrent loan balances also dropped by 5.3%, the 27th time in the last 28 quarters that they have declined. The downward trend was broad, including noncurrent residential mortgage loans and noncurrent C&I loans.
The industry also showed indications of optimism. Banks set aside $12 billion in provisions for loan losses – a $541 million drop from a year earlier and an 11-quarter low.
But there were more worrying signs.
For one, loan balances fell by $8 billion, or 0.1%, compared to the end of 2016, marking their first quarterly decline since 2013. This was partly due to a seasonal reduction of credit card debt, as consumers paid down their holiday purchases. Credit card loans dropped 5.5% and residential loans fell by 0.5%, but C&I loans and real estate loans secured by nonfarm nonresidential properties both increased, by 1.3% and 1.7% respectively.
Loan charge-offs to individuals also increased year-over-year for the sixth consecutive quarter. In the first quarter, banks charged off $11.5 billion in loans, a 13.4% increase from 2016.
The overall decline in loan balances underscores a trend of weak loan growth. The annual rate of loan growth was only 4% in the first quarter, compared to the post-crisis peak of 7% reached a year ago.
“As the U.S. economy approaches the end of the eighth year of expansion, a slowdown in loan growth is not unusual at this stage of the credit cycle,” said Gruenberg. “It is also worth noting that despite the slowdown, loan growth has remained at or above nominal GDP growth.”
Another sign of risk for banks, particularly community banks, is that more are reaching for yield. The share of longer-term assets held by banks decreased slightly in the first quarter, compared to last year – but it remained at a near-record high since the crisis, with 35.4% of loans and securities with 3 year or above maturities.
“This has left many institutions vulnerable to interest-rate risk,” said Gruenberg.
Banks also benefited from the increase in short-term interest rates. The industry’s average net interest margin was 3.19% in the first quarter, marking a stark recovery from the post-crisis low of 3.02% reached at the same time last year.
The number of banks on the FDIC’s “problem list” fell to 112, reaching its lowest level since the first quarter of 2008. Three banks failed during the first quarter and two new bank charters were formed.
But the Deposit Insurance Fund's ratio of reserves to insured deposits stayed level compared to the fourth quarter, at 1.20%. This was “due in part to strong growth in estimated insured deposits,” said Gruenberg.