Big banks, hit hard by global economic turmoil, dragged industry earnings down 7% in the third quarter, the Federal Deposit Insurance Corp. said Wednesday.
The decline, to $15 billion, broke a six-quarter run of record-setting profits by FDIC-insured commercial banks. They had hit a high of $16.1 billion in the second quarter.
FDIC Chairman Donna A. Tanoue blamed the drop on "significant earnings problems at several very large banking companies." The agency said profits at the 25 largest banking companies fell 32%, to $6.8 billion in the quarter.
A key factor was a 75% decrease in pretax revenue from trading activities, to $655 million in the third quarter.
A decline in credit quality also hurt. In the 12 months ended Sept. 30, noncurrent loans to foreign borrowers shot up 80.3%. Noncurrent loans for the quarter jumped $468 million, to $29.5 billion; one-third of the increase was international.
By contrast, the dollar amount of past-due loans to domestic borrowers fell 1.6% in the 12 months through Sept. 30. Noncurrent loans remained at 0.94% of the total in the third quarter-a 17-year low.
Loan chargeoffs rose 17.7% in the latest quarter, to $5.7 billion. The net chargeoff rate-chargeoffs divided by all loans-rose to 0.73%, from 0.63% in the second quarter, and was at its highest level since 1993's fourth quarter.
Earnings of the 8,910 banks were diminished by credit-loss provisioning, which rose 25.1%, to $6.6 billion in the third quarter. Overseas activity accounted for $203 million of the increase, and U.S. operations $1.2 billion.
Loan-loss reserves, a source of contention recently between bank regulators and the Securities and Exchange Commission, rose less than 2%, to $57.3 billion. Reserves as a proportion of noncurrent loans hit an all- time high, rising slightly, to $1.94 in reserves for every dollar of noncurrent loans.
Helping earnings in the third quarter were a 14.5% reduction in income taxes, to $7.6 billion, and a 1.7% gain in net interest income, to $46.3 billion.
Ms. Tanoue tried to downplay the bad news.
"Even with the earnings decline, the numbers show a strong and resilient commercial banking industry well positioned to deal with problems from an economic downturn," she said, noting that 55% of banks posted higher earnings in the third quarter.
Earnings from domestic operations grew 3.1% in the third quarter, to $14.5 billion, the second-best quarterly result ever. The industry remains on pace for another annual income peak. If aggregate net income is $12.1 billion in the fourth quarter, the 1997 earnings record of $59.2 billion will be broken.
Performance varied widely by asset size. For the 64 banks with assets above $10 billion, the return on assets fell to 0.97%, from 1.18% in the second quarter. That is a two-and-a-half-year low.
The ROA for all other banks rose to 1.47% in the third quarter, from 1.37%. For the industry as a whole, ROA fell to 1.15%, from 1.25% in the second quarter.
Equity capital increased to $457.4 billion, or 8.68% of total industry assets, in the third quarter, up from 8.60% in the second quarter. That is the highest percentage since 1941.
"The best sign of strength for the industry going forward is that there are huge amounts of capital and very, very small amounts of problem loans," said James A. Chessen, chief economist at the American Bankers Association.
It was the best quarter ever for FDIC-insured savings institutions. These 1,713 thrifts earned $3 billion in the third quarter, compared with $2.8 billion in the second. The FDIC attributed much of the improvement to a 41% rise in noninterest income from assets sold by several large institutions. In fact, only 44% of all thrifts made more money in the third quarter than in the second.
The universe of FDIC-insured banks and thrifts shrank by 92 in the third quarter, to 10,623. Mergers eliminated 151, and failures another two. Meanwhile, 61 new institutions were chartered.
The number of problem banks jumped to 70, from 64 in the second quarter, and their assets rose 7.4%, to $5.4 billion. The number of problem thrifts remained at 18, with $2.9 billion of assets.