Recent FDIC reports have highlighted the stability and growing profitability among the nation’s financial institutions. In examining (2) key measures of asset quality (net charge-off rates as a percent of loans) and profitability (ROA), the data suggests both measures have stabilized for commercial banks since the financial crisis.
Recall that weaknesses began to appear in agency mortgage portfolios in 2007. This resulted in the “crisis” of 2008 and the government TARP program and the economic consequences in the private sector.
The graph below illustrates both the spike in loan losses and the drop in profitability as measured by Return on Assets.
Source: FDIC Statistics on Depository Institutions Report, available at www.fdic.gov.
There are two interesting things about these data. First, note duration of time that loan losses remained at historic highs. Losses began to escalate in 2007, peaked in 2010, and then did not fall below pre-crisis levels until 2014. This illustrates the cascading or domino effect as economic conditions worsened. This meant, as well, that some institutions sustained losses immediately while others did not until well into the downturn.
The second interesting observation is that profitability as measured by ROA stabilized more quickly than loan losses. While loan losses remained high and continued to fall through 2015, ROA has remained relatively constant since 2012. Profitability, however, has been hovering around 1% which is historically still low.
There has been virtually no growth in ROA for the last 4 years when averaged across the nation’s commercial banks. This is likely to remain the case until the interest environment changes and the economy has a full recovery and a return to robust growth.