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FDIC-Insured Banks' Profit Up in 3Q

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Federal Deposit Insurance Corporation (:FDIC)-insured commercial banks and savings institutions reported third-quarter 2012 earnings of $37.6 billion, outpacing the prior-year quarter’s earnings of $35.2 billion by nearly 7%. This marks the highest quarterly net income reported by the industry since the third quarter of 2006.

Overall, the banking industry is exhibiting gradual improvement as evident from the third quarter. Though the number of troubled assets and institutions remain high, they are striving hard to regain composure. Moreover, loan and deposit balances increased in the quarter while loss provisions declined.

Major banks like JPMorgan Chase & Co. (JPM), Wells Fargo & Company (WFC) and Bank of America Corporation (BAC) contributed to the overall earnings growth. These banks (with at least $10 billion of assets) have earned nearly 82% of the industry's total third-quarter profit. These banks earned $30.9 billion during the reported quarter.

Performance in Detail

Institutions are striving hard to be profitable and are bolstering their productivity. This is evident as nearly 58% of all institutions insured by the FDIC reported enhanced quarterly net income compared to the prior-year quarter. Further, shares of institutions reporting net losses for the quarter fell to approximately 11% from 14% in the last year.

Moreover, average return on assets (:ROA) surged to 1.06% from 1.03% in the year-ago quarter.

Net operating revenue stood at $169.6 billion, up 3.0% year over year. The surge was largely driven by increases in non-interest income and gains from loan sales.

Net interest income totaled $106.0 billion, up 0.7% from the prior-year quarter. Likewise, non-interest income rose 7.0% to $63.7 billion from $59.5 billion recorded in the prior-year quarter.

Moreover, total non-interest expenses for the institutions were $104.5 billion in the quarter, elevating 4.0% on a year-over-year basis.

Credit Quality

Overall, credit quality marked an improvement in the third quarter of 2012. Net charge-offs dipped by 16.5% to $22.3 billion from $26.7 billion in the third-quarter of 2011. Further, for the 10th consecutive quarter, the level of non-current loans and leases (those 90 days or more past due or in non-accrual status) declined.

Loss provisions for the institutions in the reported quarter were recorded at $14.8 billion, down 20.6% from $18.6 billion kept for losses in the prior-year quarter. This marks the 12th consecutive quarter in which loss provision plummeted on a year-over-year basis.

Balance Sheet

Total loans and leases were $7.6 trillion, up 3.2% year over year. This marked the fifth quarterly increase in loans in the last six quarters. Total deposits also continued to rise and were recorded at $10.5 trillion, up 5.0% year over year.

As of September 30, 2012, the net worth of the Deposit Insurance Fund (:DIF) increased to $25.2 billion, up from $22.5 billion as of June 30, 2012. A jump in assessment revenue and lower expectation of bank failures continued to impel growth in the fund balance.

Bank Failures and Problem Institutions

During the third quarter of 2012, 12 insured institutions failed, marking the smallest number of failures in a quarter since the fourth quarter of 2008. Moreover, in the first nine months of 2012, a total of 43 insured institutions failed, with combined assets of $9.5 billion.

As of September 30, 2012, the number of "problem" institutions declined from 732 to 694, the lowest since the third quarter of 2009. Total assets of "problem" institutions also fell to $262 billion from $282 billion.

Still a Long Way to Go

Beside a considerable drop in the list of problem institutions, the 13th straight quarter of consolidated profit from FDIC-insured banks is quite impressive. While the financials of a few large banks continue to stabilize on the back of an economic recovery, the industry still remains on shaky ground.

The sector presents a similar picture to that of 2011, with nagging issues like depressed home prices along with still-high loan defaults and unemployment levels troubling such institutions. Further, the lingering economic uncertainty and its effects continue to weigh on many banks. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to various problems.

Yet, banks are actively responding to every legal and regulatory pressure. In fact, this promptness has positioned the banks well to encounter impending challenges. As the sector is undergoing a radical structural change, it is expected to witness headwinds in the near to mid term. But entering the new capital regime will significantly improve the industry’s long-term stability and security.

However, we do not expect the potency of the sector to return to its pre-recession peak anytime soon. The economic intricacy may lead to further disappointments in the coming quarters. Nevertheless, it would be unfair to say that there has been no improvement. We believe the industry is gradually moving closer towards regaining investor confidence.

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