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FDIC-Insured Banks Q2 Earnings Down, Provisions Up on Weak Economy

·5 min read

The Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported second-quarter 2020 earnings of $18.8 billion, significantly down 70% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6.6 billion, up 3.2% year on year.

Banks’ earnings were thwarted by deteriorating economic activity on the coronavirus mayhem, which resulted in higher provision expenses. Moreover, fall in net interest margin and elevated operating expenses were major drags. However, stellar non-interest revenues were a positive. Further, rise in loans and deposits were driving factors. In addition, problem banks near historic lows were a tailwind.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the June-end quarter. Though such banks constitute only 1.8% of the total number of domestic banks, these accounted for approximately 80% of the industry’s earnings. Leading names in this space include JPMorgan JPM, Bank of America BAC, Citigroup C and Wells Fargo WFC.

Among the above-mentioned banks, JPMorgan and BofA carry a Zacks Rank #3 (Hold), while Citigroup and Wells Fargo carry a Zacks Rank #4 (Sell), at present.

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Net Operating Revenues Fall, Costs Flare Up

Banks have been striving to boost their productivity and generate higher profits. Around 47.5% of all FDIC-insured institutions reported declines in the quarterly net income, while the remaining registered increases from the prior-year quarter level. Additionally, the percentage of institutions reporting net losses in the quarter went up to 5.4% from the prior year.

As of Jun 30, 2020, the measure for profitability or average return on assets edged down to 0.36% from the 1.38% recorded as of Jun 30, 2019.

Net operating revenues came in at $202.3 billion, down 1.4% year over year. A fall in net interest income was mostly offset by high non-interest income.

Net interest income was $131.5 billion, down 5.4% year over year. Remarkably, 42.2% of banks witnessed fall in net interest income.  Marking the third consecutive quarter of year-over-year decline, the three largest institutions resulted in this downside. Net interest margin (NIM) edged down to 2.81% from the 3.39% recorded in the year-earlier quarter. Decline in asset yields more than funding costs on significant increase in low yielding assets resulted in the lowest ever NIM.

Non-interest income for banks increased 6.9% year over year to $70.8 billion. This upside resulted from higher trading revenues and net gains on loan sales.

Total non-interest expenses for the establishments were $122.3 billion during the April-June quarter, flaring up 6.2%, year over year, on rise in salary and employee-benefit expenses and goodwill impairment charges.

Credit Quality: A Concern?

Overall, credit quality metrics deteriorated in the reported quarter. Net charge-offs increased to $15.6 billion, up 22.2% year over year. Markedly, higher commercial and industrial charge-offs mainly aided this upside.

In the June-end quarter, provisions for loan losses for the institutions were $61.9 billion, which more than trebled on weaker economic conditions as well as the implementation of the current expected credit losses (CECL) accounting methodology. The level of non-current loans and leases climbed 15.5% sequentially to $118.3 billion. The non-current rate was 1.08%.

Solid Loan & Deposit Growth

Capital position of banks remained solid. Total deposits kept rising, amounting to $17 trillion, up 7.6% sequentially. Additionally, total loans and leases were $11 trillion, jumping slightly.

As of Jun 30, 2020, the Deposit Insurance Fund balance increased to $114.7 billion from $107.4 billion as of Jun 30, 2019. Higher assessment income primarily supported growth in fund balance, while interest earned on investment securities declined.

Low Bank Failures, New Charter Added

During the April-June period, one bank failed, one new charter was added, while 47 were merged. As of Jun 30, 2020, the number of ‘problem’ banks increased from 54 to 52. This number remains near historic lows. Total assets of the ‘problem’ institutions increased to $48.1 billion from the $44.5 billion reported in the January-March quarter.

Our Viewpoint

‘Problem’ institutions near historic lows looks encouraging, with the second quarter registering solid non-interest income. Banks have been gradually easing their lending standards and trending toward higher fees to counter pressure on the top line.

Though the recent interest-rate cuts amid the coronavirus concerns might impact the lending scenario, banks need to maintain their underwriting standards, along with cautious risk management, to sail through the existing economic cycle. Nevertheless, rise in expenses and provisions were headwinds, which need to be controlled to keep the profits up.

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