WASHINGTON — The banking industry logged a solid period of growth in the third quarter, with earnings rising 12.9% from a year earlier to $45.6 billion, a boost driven primarily by a strong increase in net interest income, according to a report issued Tuesday by the Federal Deposit Insurance Corp.
"The banking industry reported another positive quarter," FDIC Chairman Martin Gruenberg said in remarks prepared for delivery. "Revenue and net income were up from a year ago, loan balances increased, asset quality improved and the number of unprofitable banks and 'problem banks' continued to fall."
The FDIC's Quarterly Banking Profile showed positive signs across the board, including increases in net interest and noninterest income, better loan growth and a drop in noncurrent loans. Overall, 60.8% of banks reported year-over-year growth in quarterly earnings — while the industry reached its lowest proportion of unprofitable banks since the third quarter of 1997
The increase was primarily due to net interest income, which rose 9.2%, to $119 billion, from the same period last year, while noninterest income grew 1.9% to $64.5 billion. Driving factors for these increases include an increase in interest-bearing assets, in addition to trading revenue and servicing-income growth.
But certain one-off outcomes also helped. The increase in net interest income was driven in part by one-time "accounting and expense items" at three large institutions, according to the FDIC. In addition, the industry's aggregate net interest margin rose 10 basis points, to 3.18% year over year, but this improvement was not widespread. Indeed, 53.5% of banks reported lower net interest margins from last year.
Still, net operating revenue — which is the sum of net interest income and noninterest income — reached $183.3 billion, or 6.5% higher than the same period last year.
Total loan balances also grew at a steady clip, rising 6.8% — or $590.8 billion — compared with last year's third quarter. This included increases in residential mortgages and credit card balances. Total assets rose 1.4% in the third quarter.
There were some signs of lurking risk in the industry's balance sheet. Net chargeoffs rose 16.9% to $10.1 billion. This marked the fourth consecutive quarter of net chargeoff growth.
And though the amount of noncurrent loans and leases fell by 1.8% from the second quarter, it was an uneven trend. Noncurrent credit card loans rose 12.9%, while noncurrent real estate loans fell 3.8%.
Some of these loan chargeoffs and noncurrent loans increases were driven by areas with higher energy dependence, according to the FDIC.
"Current oil and gas privces continue to put pressure on borrowers that depend on the energy sector," Gruenberg said. "This stress has contributed to modest increases in noncurrent loans and loan chargeoffs in in energy-dependent regions."
Banks are also becoming more prudent, with loan-loss reserves rising 34%, to $11.4 billion.
"Part of the increase in provision expenses was associated with loan growth and the related credit risk in those new loans," Gruenberg said. "Another part was due to the increase in credit risk associated with loans to borrowers that depend on the energy sector."
At the same time, noncurrent loans declined, leaving banks better prepared for any potential downturn. The reserve coverage ratio — measured by the relation of loan-loss reserves to noncurrent loan balances — reached 91% in the quarter, the highest since 2007.
This has "improved the industry's ability to absorb credit deterioration," Gruenberg said.
The number of problem institutions dropped to 132, from 147 in the second quarter — reaching its lowest ebb since the third quarter of 2008.
The Deposit Insurance Fund increased by $2.8 billion, driving the reserve ratio up 1 basis point, to 1.18%, compared with the second quarter.