Bank Profits Return to Pre-Crisis Levels; Earnings at $35.3B in 3Q
WASHINGTON — Boosted by a decline in loan loss provisions and growth in their lending portfolios, bank profits surged to $35.3 billion in the third quarter, their highest level in more than four years, according to a report released Tuesday by the Federal Deposit Insurance Corp.
The agency's Quarterly Banking Profile reported that net income rose 48.6% from the same point a year earlier and that nearly two thirds of institutions had higher profits than a year ago.
As it has been in the past several quarters, lower provisions helped drive earnings. The industry set aside $18.6 billion to cover loan losses. While only 2.6% less than the second-quarter, the provision was a 47% decline from the third quarter of 2010 and amounted to lowest amount set aside since the third quarter of 2007.
"We continue to see income growth that reflects improving asset quality and lower loss provisions," acting FDIC Chairman Martin Gruenberg said in a prepared statement. "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 industry also enjoyed a 0.5% bump in net operating revenue compared with a year earlier, thanks in part to a $3.2 billion — or 5.8% — increase in noninterest income. It was the first year-over-year increase in noninterest income in seven quarters.
But the agency noted that operating revenue, which has slumped in recent quarters, was buoyed in part by a few large banks — facing a decline in value on some of their liabilities — booking large accounting gains.
"Absent these unrealized gains, net operating revenue would have posted a year-over-year decline for a third consecutive quarter," the FDIC said in the report.
Loan balances showed modest improvement for the second straight quarter. Industry assets increased during the quarter by 1.5% to $13.8 trillion, and total loans rose by 0.3% to $7.33 trillion.
Asset growth was concentrated in mortgage-backed securities, which rose by $54 billion, and a 3.6% rise in commercial and industrial loans to $1.28 trillion. The $23.7 billion rise in residential mortgages was the largest such increase since the third quarter of 2007.
Still, Gruenberg said the loan growth was not robust enough for future earnings to be sustainable, and the industry's profitability was still relying on lower loss provisions. Certain asset categories — including balances at the Federal Reserve banks and real estate construction loans — declined.
"After three years of shrinking loan portfolios, any loan growth is positive news for the industry and the economy, but the lending growth we are seeing remains well below normal levels," he said.
The number of banks on the FDIC's "problem list" also continued to decline, falling by 21 to 844 during the third quarter. Total assets of such banks dropped by $33 billion to $339 billion.