Slideshow Six takeaways from FDIC's 4Q report on banks' health

Published
  • February 27 2018, 3:51pm EST
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Tax reform gut punch: Banks’ 4Q profits take a beating

The tax reform law passed late last year, which significantly cut the corporate tax rate, has been widely popular among banks, but a one-time hit to the value of their deferred tax assets was felt far and wide.

The Federal Deposit Insurance Corp. said Tuesday in the Quarterly Banking Profile that net income fell nearly 41% in the fourth quarter from a year earlier because of the tax law. The repatriation of income from foreign subsidiaries also had a negative effect.

However, the industry also had much to be pleased about in the quarter, including better loan growth, a higher net interest margin, fewer "problem banks" and continued growth in the Deposit Insurance Fund.

"Notwithstanding the one-time impact of the new tax law, the overall performance of the industry continued to be positive," said FDIC Chairman Martin Gruenberg.

"Community banks also were affected by the new tax law in the fourth quarter, primarily from the one-time revaluation of deferred tax assets," Gruenberg added. "However, net interest income was up significantly at community banks, as net interest margins improved and their loan growth outpaced that of the overall industry."

The average net interest margin rose to 3.31% in the quarter, a 15-basis-point increase from a year earlier. It was the highest quarterly net interest margin since late 2012. Yet there were some other hits that banks took to earnings besides the tax reform law. Banks set aside 8.9% more in their loan-loss provisions from a year earlier. Provisions totaled $13.6 billion in the quarter.

"More than one in three (38.9 percent) institutions reported higher loan-loss provisions than in fourth quarter 2016," the agency said.

And banks also charged off $1 billion more in delinquent loans during the fourth quarter. Net charge-offs rose 8.6% from a year earlier, to $13.2 billion.

"This marks a ninth consecutive quarter that net charge-offs increased," the FDIC report said.

Here are some takeaways from the FDIC's fourth-quarter report:

Total net income fell 41% for the quarter and 3.5% for the year

With the tax overhaul enacted by Congress sparking a one-time reduction in the the value of banks' deferred tax assets, net income was sharply down in the fourth quarter, falling 40.9% from a year earlier to $25.5 billion. The FDIC estimated net income would have totaled $42.2 billion (just a 2.3% reduction) without the effects of the tax law.

Net income for all of 2017 was down 3.5% as a result of the tax reform changes, totaling $164.8 billion. Higher noninterest expenses, which were up 4.6% for the year, also were a drain on earnings. But on the bright side, net operating revenue increased by $39.5 billion from 2016.

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Net interest income growth strengthened banks' revenue performance

Net interest income rose over 8% from the fourth quarter of 2016, which contributed to a 5.5% increase in net operating revenue and helped to offset a 0.3% reduction in noninterest income.

"More than four out of five banks (86.4 percent) reported higher net interest income from a year ago, as interest-bearing assets increased (up 4.4 percent) and the average NIM increased to 3.31 percent from 3.16 percent a year ago," the report said.

Noncurrent loans and net charge-offs are evening out after sharp drops

With banks continuing to expand their loan portfolios, the rate of noncurrent loans was stable while the net chargeoff rate rose slightly.

The $13 billion in chargeoffs was 8.6% higher than a year earlier, the ninth consecutive quarter that net chargeoffs increased. The increase in net chargeoffs was led by credit card balances, while chargeoffs declined for C&I loans, home equity loans and mortgages. The average net chargeoff rate grew from 0.52% at the end of 2016 to 0.55%.

Meanwhile, noncurrent loans rose 1.3% during the fourth quarter, following six consecutive quarters of declines.

"The noncurrent rate was unchanged at 1.20%," said Gruenberg. "The net charge-off rate increased slightly to 0.55%, but remains near its post-crisis low."

Fewer than 100 'problem banks'

The FDIC’s so-called problem-bank list fell by nine banks to 95, the lowest number since the fourth quarter of 2008. The assets of banks on the list fell by over $2 billion to $13.9 billion.

Meanwhile, the FDIC said five new bank charters were added in 2017 while 230 institutions were absorbed by mergers and there were eight bank failures.

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DIF reserve ratio hits 1.3%

The Deposit Insurance Fund rose by $2.2 billion during the quarter and the ratio of insurance reserves to insured deposits rose 2 basis points to 1.3%, moving the insurance close to the statutory minimum of 1.35%.

Noncurrent C&I loans decline

Past-due residential mortgages and credit card balances were the two main contributors to the spike in noncurrent loans. However, the amount of noncurrent commercial and industrial loans fell by $1.7 billion, or 8.5%, which helped offset the overall increase in noncurrent loans.