Slideshow Optimism, pain points in FDIC’s 3Q report card

  • November 21 2017, 2:05pm EST
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WASHINGTON — It was mostly good news for banks in the Federal Deposit Insurance Corp.'s third-quarter industry report card, a trend that has been relatively steady of late.

Earnings were up from a year earlier, reaching $47.9 billion. The average net interest margin rose 12 basis points from a year earlier to 3.30%, and average interest-bearing assets rose by 3.6%. Net interest income increased 7.4% year over year to $127.5 billion. More than 83% of all banks reported an increase in net interest income, and almost two out of every three banks reported higher net interest margins.

The trend was even true for community banks, which outperformed their peers. Their earnings grew 9.4% from a year earlier. The FDIC itself reported a successful quarter, with the ratio of insurance reserves to insured deposits increasing to 1.28% as of Sept. 30. That is the highest reserve ratio since the second quarter of 2005, when it was 1.24%.

Yet there were also signs of potential trouble to come. A slowdown in asset growth and gradually increasing charge-offs remain worries. Even though total assets increased by $168.8 billion, or 1%, during the quarter, asset growth slowed for the fourth consecutive quarter. Loan balances increased $96 billion during the third quarter, but that was down from $161 billion in the second quarter. Meanwhile, it was the eighth consecutive quarter that charge-offs increased.

“While overall performance improved from the prior year, the interest rate environment and competitive lending conditions continue to pose challenges for many institutions,” said FDIC Chairman Martin Gruenberg. “In addition, with the economy in the ninth year of an expansion that has been characterized by modest economic growth, the annual rate of loan growth has slowed in recent quarters.”

Here are some data snapshots from the Quarterly Banking Profile:

Loan growth remains a sore spot

Arguably the most concerning part of the QBP was lending growth, which is sluggish and declining.

Loan balances rose $96 billion during the third quarter, just 60% of second-quarter growth. That said, all major loan categories increased in the latest quarter.

Still, the overall 12-month growth rate fell to 3.48%, from 3.70% a quarter earlier. Overall, it was the fifth consecutive quarterly decline, suggesting potential trouble in the future.

"While a slowdown in loan growth is not unusual at this stage of the credit cycle, we are monitoring it closely," Gruenberg said.

Analysts raised other concerns.

"The news was even worse for banks than the headline suggests," wrote Jaret Seiberg, an analyst with Cowen Washington Research Group. "Loan and lease balances only grew 1% during the quarter. Pushing that growth was the 2.3% growth in construction and land development lending."

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Deposits are also down

Like loan growth, deposits are still increasing, just at a slower pace.

Deposit growth fell to 3.3% in the third quarter of 2017, well below the 6.7% growth a year earlier.

The FDIC didn't offer much context for why deposit growth has slowed. Deposits overall increased by $111 billion in the third quarter, but declined in consumer accounts by $69 billion. Much of what growth there was appeared to be in funds above the $250,000 per account limit. Such deposits increased by $87.6 billion in the quarter.

Despite sluggish loan growth, banks’ net interest income climbed 7.4% year over year to a record $127.5 billion, thanks largely to rising interest rates.

Fee income, on the other hand, fell 1% from a year earlier to $64.2 billion, as strong growth in income from fiduciary activities could not offset steep declines in both servicing fee income and fees from loan sales.

Big banks are catching up on net interest margins

Net interest margins rose for most banks, reaching 3.3% in the third quarter, up from 3.18% a year earlier.

While community banks continue to lead the industry, with a 3.65% net interest margin, their advantage is shrinking.

"Large institutions have benefited more than community banks from rising short-term interest rates, as large institutions have a greater share of assets that reprice quickly," Gruenberg said.

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The Deposit Insurance Fund is recovering

Another good sign for banks was the ratio of reserves to deposits, which hit 1.28% as of Sept. 30. That's the highest such ratio since the second quarter of 2005, when it was 1.24%.

The FDIC is required by the Dodd-Frank Act to increase the reserve ratio to 1.35% by the third quarter of 2020. What the higher level likely means is that the FDIC may ease back on premiums, which have been raised to help rebuild the fund. The faster the fund reaches 1.35%, the easier banks can breathe.