WASHINGTON The banking industry earned a record profit for the second straight quarter as growth in noninterest income continued to make up for a slow recovery in the lending sector, the Federal Deposit Insurance Corp. said Thursday.
Institutions earned a total of $42.2 billion in the second quarter, a 23% increase from the quarterly income posted a year earlier and a 4.7% increase from the previous record of $40.3 billion reported in the first quarter.
But with loan growth still sluggish, the FDIC again attributed the earnings growth largely to lower loan loss provisions and higher noninterest income, particularly trading income. Banks are also beginning to see clear effects from fluctuating interest rates.
"Asset quality continues to recover, loan balances are trending up, fewer institutions are unprofitable, the number of problem banks is down, and the number of failures is significantly below levels of a year ago," FDIC Chairman Martin Gruenberg said in a statement prepared for the release of the Quarterly Banking Profile.
"However, industry revenue growth remains weak, reflecting narrow margins and modest loan growth. And the current interest rate environment creates an incentive for institutions to reach for yield, which is a matter of ongoing supervisory attention. Nonetheless, overall these results show a continuation of the recovery in the banking industry."
The industry's average quarterly return on assets was 1.17%, which is well above the 0.99% return of a year earlier, but below the 1.27% average from 2000 through 2006. Nearly 54% of all banks reported higher quarterly income than a year earlier, and just over 8% reported a loss.
As noninterest income rose 11% from a year earlier to $66.9 billion, net operating revenue totaled $170.6 billion, a 3% increase from a year earlier. Trading-related income rose more than 238% compared with a year earlier. But that was coupled with a 1.7% year-over-year decline in net interest income to $103.7 billion, the third such decline in a row.
"Interest income from loans and other investments declined faster than interest expense on deposits and other liabilities," the FDIC said.
Meanwhile, the $8.6 billion set aside in loan loss provisions was nearly 40% lower than the provisions set aside a year earlier.
Despite the challenging loan environment, institutions were still able to manage 1% growth in total loans from the previous quarter, registering an overall loan balance of $7.73 trillion. Commercial and industrial loans rose 2% to $1.56 trillion. But balances of 1-to-4 family residential mortgages fell 1.3% to $1.08 trillion. Overall industry assets declined 0.1% to $14.41 trillion as assets held in trading accounts fell 9.1%.
"Trading securities are reported at market value, so it is likely that some of this decline was caused by the rise in medium- and long-term interest rates during the quarter," the FDIC's report said.
The number of banks on the FDIC's "problem" list fell by 59 institutions to 553. The ratio of FDIC insurance reserves to insured deposits increased 4 basis points during the quarter to 0.63%.