FDIC's quarterly report shows extent of pandemic's hit to bank profits

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WASHINGTON — The nation’s banks weathered a tumultuous second quarter as the economy continued to feel the brunt of the coronavirus pandemic, the Federal Deposit Insurance Corp. said Tuesday.

Banks reported a decline in quarterly net income decline of 70% from a year earlier to $18.8 billion, driven by surging loan-loss provisions that grew over 380% grew to $61.9 billion. However, quarterly profits were slightly above the industry's first-quarter earnings total.

Beyond economic headwinds, the FDIC also cited the adoption of the current expected credit losses accounting methodology as a leading driver of loan-loss provisions. Among the 253 banks that have adopted CECL, loan-loss provisions swelled by nearly 420% from a year earlier, while non-CECL banks reported an increase of 207%.

At the same time, the banking industry is being challenged by narrowing net interest margins. The average net interest margin fell by 58 basis points from a year earlier to 2.81%. Net interest income declined 5.4% to $131.5 billion. The FDIC emphasized that much of the decline was “driven by the three largest institutions, as less than half (42.2 percent) of all banks reported lower net interest income from a year ago.”

“This is the lowest NIM ever reported in the Quarterly Banking Profile,” the FDIC said in its report.

Meanwhile, the FDIC continues to report huge deposit inflows at banks, with total deposit balances increasing by $1.2 trillion from the first quarter of 2020. Deposit inflows have been so strong, the FDIC reported, that the reserve ratio of the agency’s Deposit Insurance Fund had fallen below its legal minimum: from 1.39% in the first quarter to 1.30% in the second quarter. The FDIC is statutorily required to maintain a ratio above 1.35%.

“I want to emphasize that the Fund has more money than at any time in the FDIC’s history, and the reduction in the reserve ratio was solely a result of the unprecedented increase in bank deposits,” FDIC Chair Jelena McWilliams said in prepared remarks. A $1.4 billion increase in the fund pushed its balance to $114.7 billion.

“We believe deposit growth is likely to normalize in the upcoming quarters and for the reserve ratio to rise about 1.35 without any need to modify assessment rates in the near term,” McWilliams said.

In addition to earnings, credit quality is also taking a hit from the pandemic. The FDIC reported a 22% increase in net charge-offs from a year earlier to $15.6 billion, which was the largest percentage increase since the first quarter of 2010. The charge-off rate rose 7 basis points to 0.57%.

The uptick was driven mainly by charge-offs in commercial and industrial loan portfolios, which grew more than 128% from a year earlier.

The C&I loan net charge-off rate "rose by 31 basis points from a year ago to 0.64 percent, but remains well below the post-crisis high of 2.72 percent reported in fourth quarter 2009," the FDIC said.

McWilliams said the banking industry remains a source of strength for the broader economy.

“Banks of all sizes supported their customers and communities,” she said, pointing to banks’ role in the Paycheck Protection Program.

“Nevertheless, lower levels of business activity and consumer spending — combined with uncertainty about the path of the economy and the low interest-rate environment — contributed to higher provisions for loan and lease losses, as well as a decrease in net interest margins,” she said. “Notwithstanding these disruptions, however, the banking industry maintained strong capital and liquidity levels at the end of the second quarter, which will protect against potential losses in the future.”

One bright spot for the industry could be found in noninterest income, which increased nearly 7% year over year. Higher trading revenues led the increase, swelling by 80.2%, as did net gains in loan sales, which increased by $4.1 billion.

Community banks also fared better than their larger peers in the second quarter, their net income rising 3.2% from a year earlier despite an increase of nearly 273% in loan-loss provisions. Community bank net income was buoyed primarily by gains made on loan sales, the FDIC reported.

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Earnings Coronavirus FDIC Net interest margin Deposit insurance
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