WASHINGTON — Bank earnings jumped to $43.7 billion in the fourth quarter, a 7.7% increase from the same period last year, driven largely by an increase in net interest income, according to a report issued Tuesday by the Federal Deposit Insurance Corp.
“The banking industry had another largely positive quarter,” FDIC Chairman Martin Gruenberg said in remarks prepared for delivery. “Both quarterly and full-year earnings were up from the prior year, loan balances increased, overall asset quality improved, and the number of unprofitable banks and ‘problem banks’ continued to fall.
The rising tide also lifted more banks. Only 8% of banks reported a net loss in the fourth quarter, compared with nearly 10% in the same period last year. Overall, almost 60% of banks reported year-over-year profit growth.
Banks' net operating revenue grew 4.6% to $181.8 billion on the year, thanks mostly to an $8.4 billion, or 7.6%, increase in net interest income. Noninterest income, meanwhile, dropped by $480 million, or 0.8%, mostly because of a $950 million decline in income from fair value changes as well as a $432 million drop in interchange fees.
The industry's net interest income grew thanks in part to a 5.2% spike in interest-bearing assets for the year, according to the FDIC's Quarterly Banking Profile. The data also pointed to a trend of banks extending their asset maturities since 2009 to boost their interest margins. Net interest margins were 3.16% overall in the fourth quarter, up from 3.12% at the same time last year. Still, a majority of banks saw their net interest margin decline over that same period.
As they have in several recent quarters, community banks fared better than the rest of the industry overall, with net income rising 10.5% from last year, to $5.3 billion.
Meanwhile, the share of loans and securities that have been extended for more than three years reached 35.5% in the fourth quarter, its highest level since at least the late 1990s.
“The industry continues to face challenges,” Gruenberg said. “Margin pressures have led some institutions to ‘reach for yield’ through higher-risk assets and extended asset maturities. Banks must manage their interest-rate risk, liquidity risk, and credit risk carefully for industry growth to remain on a long-run, sustainable path.”
There were other concerning signs in the data. The increase in loan balances slowed down in the fourth quarter, due to a decline in industrial loans of $8 billion and in home equity loans of $10 billion compared to the third quarter.
In 2016, loan balances grew at a much slower pace than in 2015. They increased by $466 billion, or 5.3%, compared with $530 billion, or 6.8%, in 2015. Loan growth among community banks was higher than that of the overall industry last year, at 8.3%.
But asset quality remained robust, the FDIC found. “Both the noncurrent rate and the net charge-off rate are near cyclical lows,” Gruenberg said.
The reserve coverage ratio, the relation of loan-loss reserves to noncurrent loan balances, reached 92% at year’s end, the highest since 2007.
“The ongoing decline in noncurrent loans, combined with a relatively stable level of loan-loss reserves, has led to an improvement in the industry’s ability to absorb credit losses,” Gruenberg said.
However, the data also pointed to banks being harmed by likely long-term interest rate increases. This was visible in the abrupt decline in unrealized gains for bank-held investment securities. At the end of the third quarter, banks had close to $60 billion in market value exceeding book value on their investment securities. But by the end of the year that had plummeted to nearly $20 billion in unrealized losses.
The number of banks on the FDIC’s problem bank list fell from 132 to 123 over the quarter, reaching the smallest number of problem banks since mid-2008. The number of failures also harked back to pre-recession times, dropping from eight in 2015 to five last year, the smallest number since 2007.
But the number of banks also shrank due to other dynamics. The number of institutions reporting to the FDIC throughout the year declined by 269 in 2016, and 251 banks were absorbed by mergers and acquisitions.
Driven by an increase on assessment revenue, including a new surcharge on large banks, the Deposit Insurance Fund balance reached $83.2 billion at the end of the year, up $2.5 billion from the third quarter.