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By Premier Insights

In Industry Updates

Posted November 29, 2018

Banks Report Record Profits, Agencies Propose Capital Requirements

Banks Report Record Profits, Agencies Propose Capital Requirements

Commercial banks and savings institutions insured by the Federal Deposit Insurance Corporation (FDIC) reported aggregate net income of $62 billion in the third quarter of 2018, up $14 billion (29.3 percent) from a year ago. The improvement in earnings was attributable to higher net operating revenue and a lower effective tax rate. 

Of the 5,477 insured institutions reporting third quarter financial results, more than 70 percent reported year-over-year growth in quarterly earnings. The percent of unprofitable banks in the third quarter declined to 3.5 percent from 4 percent a year ago.

Comments from FDIC Chair:

"The banking industry reported another strong quarter," FDIC Chairman Jelena McWilliams said. "Improvement in net income was led by higher net operating revenue and a lower effective tax rate. Loan balances grew, net interest margins improved, and the number of ‘problem banks’ continued to decline. Community banks also reported another positive quarter, with loan growth and a net interest margin surpassing the overall industry."

"While the performance results were strong, the extended period of low interest rates and the competition to attract loan customers have led to heightened exposure to interest-rate risk, and credit risk. Banks must maintain prudent management of these risks in order to sustain lending through the economic cycle."

Highlights from the Third Quarter 2018 Quarterly Banking Profile

Industry Net Income Registers a Strong Increase of 29.3 Percent from a Year Ago: Third quarter net income totaled $62 billion, an increase of $14 billion (29.3 percent) from 12 months ago. Improvement in net interest income and noninterest income, coupled with a lower effective tax rate, boosted the industry's net income. The average return on assets ratio rose by 29 basis points to 1.41 percent, the highest quarterly level reported by the industry since the Quarterly Banking Profile began in 1986.

Community Bank Net Income Rises 21.6 Percent from Third Quarter 2017: Reports from 5,044 insured community banks showed $6.8 billion in net income, reflecting an increase of $1.2 billion (21.6 percent) from a year earlier. This increase resulted primarily from higher net operating revenue and a lower effective tax rate. Higher net interest income (up $1.6 billion, or 8.9 percent) and higher noninterest income (up $110 million, or 2.4 percent) lifted net operating revenue by $1.7 billion (7.6 percent) from the third quarter of 2017. Community banks reported a decline in loan-loss provisions of $112.1 million (15.2 percent) and an increase in noninterest expenses of $855.1 million (6 percent).

Net Interest Margin Widens to 3.45 Percent as Asset Yield Increases Outpace Funding Cost Growth: Net interest income totaled $137.1 billion in the third quarter, an increase of $9.6 billion (7.5 percent) from a year ago. More than four out of five banks (83 percent) reported an improvement in net interest income from a year ago. The average net interest margin rose to 3.45 percent, up 15 basis points from a year ago, as average asset yields grew more rapidly than average funding costs.

Noninterest Income Grows Almost 4 Percent from a Year Earlier: Noninterest income rose by $2.4 billion (3.8 percent) from third quarter 2017, as more than half (54.2 percent) of all banks reported increases. The annual increase was led by servicing fees, investment banking fees, and other noninterest income.

Annual Growth of Loan and Lease Balances is 4 Percent: Loan and lease balances rose by $82.7 billion (0.8 percent) from the previous quarter, as all major loan categories registered growth. Over the past 12 months, loan and lease balances grew by 4 percent, a slight decline from 4.2 percent reported last quarter.

Noncurrent Rate Continues to Decline and Net Charge-Off Rate Remains Stable: The amount of loans that were noncurrent — 90 days or more past due or in nonaccrual status — totaled $101.3 billion, down $3.6 billion (3.4 percent) from the previous quarter. The largest declines in noncurrent balances were for residential mortgages (down $3.1 billion, or 6.3 percent) and commercial and industrial loans (down $1.1 billion, or 6.8 percent). The average noncurrent loan rate fell from 1.06 percent in the second quarter to 1.02 percent. Net charge-offs rose by $171.9 million (1.6 percent) from a year ago, led by an $837.8 million (12.3 percent) increase in net charge-offs for credit cards. The average net charge-off rate remained stable from a year ago (0.45 percent).

Number of Banks on the "Problem Bank List" Continues to Fall: The FDIC's "Problem Bank List" declined from 82 in the second quarter to 71, the lowest number of problem banks since third quarter of 2007. Total assets of problem banks fell from $54.4 billion in the second quarter to $53.3 billion. During the quarter, merger transactions absorbed 60 institutions, one new charter was added, and there were no failures.

Deposit Insurance Fund's Reserve Ratio Increases to 1.36 Percent: The Deposit Insurance Fund (DIF) balance rose by $2.6 billion during the third quarter to $100.2 billion, driven by assessment income. The DIF reserve ratio rose from 1.33 percent at the end of the last quarter to 1.36 percent. The third quarter of 2018 marks the last period that large banks will be assessed quarterly surcharges by the FDIC. 

Simplification of Cap Requirements Proposed for Institutions < $10 Billion

Three federal banking agencies request public comment on a proposal that would simplify regulatory capital requirements for qualifying community banking organizations, as required by the Economic Growth, Regulatory Relief, and Consumer Protection Act.  The proposal is intended to provide regulatory burden relief to qualifying community banking organizations by giving them an option to calculate a simple leverage ratio, rather than multiple measures of capital adequacy.

Under the proposal, a community banking organization would be eligible to elect the community bank leverage ratio framework if it has less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a community bank leverage ratio greater than 9 percent. 

A qualifying community banking organization that has chosen the proposed framework would not be required to calculate the existing risk-based and leverage capital requirements. 

Such a community banking organization would be considered to have met the capital ratio requirements to be well capitalized for the agencies’ prompt corrective action rules provided it has a community bank leverage ratio greater than 9 percent. 

The proposal is receiving mixed reviews in the industry with some observers suggesting the change does not go far enough in providing relief to smaller institutions.

The entire proposal can be accessed here:
https://www.fdic.gov/news/board/2018/2018-11-20-notice-sum-b-fr.pdf.


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