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FDIC-Insured Banks' Q2 Earnings Up, Loans Rise, NIM Shrinks

·5 min read

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported second-quarter 2021 earnings of $70.4 billion, up substantially year over year. The improvement was largely driven by negative credit costs.

FDIC Chairman Jelena McWilliams said, “The banking industry reported strong earnings in second quarter 2021, supported by continued economic growth and further improvements in credit quality.”

Community banks, constituting 91% of all FDIC-insured institutions, reported net income of $8.3 billion, up 28.7% year over year.

Banks’ earnings were driven by a rise in non-interest income and negative provisions. An increase in business activity and consumer spending, along with higher loan and deposit balances, offered support. In addition, the number of problem banks remained near historic lows, which was a tailwind. However, low interest rates and higher non-interest expenses were the major undermining factors.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the June quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these accounted for approximately 80% of the industry’s earnings. Some of the notable names in this space are JPMorgan JPM, Bank of America BAC, Citigroup C, Wells Fargo WFC, and Truist Financial TFC.

Currently, all the above-mentioned banks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, 66.4% of all FDIC-insured institutions reported growth in quarterly net income, while the remaining registered fall from the prior-year level. Also, the percentage of institutions reporting net losses in the quarter was 4.2% of all FDIC-insured institutions.

The average return on assets in second-quarter 2021 improved to 1.24% from 0.35% as of Jun 30, 2020.

Net Operating Revenues & Costs Rise

Net operating revenues came in at $205 billion, up 1.4% year over year. The rise was mainly due to higher non-interest income, which was mostly offset by a decline in net interest income.

Net interest income (NII) was $129.2 billion, down 1.7% year over year. This was the seventh consecutive quarterly decline in NII. Nonetheless, despite the aggregate decline in NII, 64.1% of all banks witnessed a rise in the same from the prior year.

Net interest margin (NIM) contracted 31 basis points (bps) to 2.50%. This was the lowest level on record in the Quarterly Banking Profile. A decline in earning asset yields more than funding costs resulted in the lowest ever NIM.

Non-interest income grew 7.1% to $75.8 billion. This upside mainly resulted from a rise in all other non-interest income and income from service charges on deposit accounts. Notably, 69.6% of all banks recorded growth in non-interest income.

Total non-interest expenses were $126.1 billion, increasing 3% from the prior-year quarter. The rise was mainly due to higher salary and benefit expenses and “all other noninterest expense.” Nearly 74.5% of banks witnessed higher non-interest expenses.

Credit Quality Improves

Net charge-offs (NCOs) were $7.3 billion, plunging 53.2% year over year and marking the fourth consecutive quarterly decline. The fall was primarily due to lower NCOs for credit cards and commercial and industrial (C&I) loans.

Provisions for credit losses were negative $10.8 billion during the second quarter against provision costs of $62.2 billion in the year-ago quarter. Almost 63.3% of all institutions reported lower provisions.

The level of non-current loans and leases declined 7.3% from the year-ago quarter to $109.7 billion. The non-current rate was 1.01%.

Loans & Deposits Rise

As of Jun 30, 2021, total loans and leases were $10.9 trillion, growing marginally from the prior quarter. This marked the first quarterly rise since the second quarter of 2020. Higher credit card loan balance (up 4.1%) and auto loan balance (up 3.8%) were the main reasons for the improvement. Nearly 50.3% of all banks recorded a sequential rise in loan balance.

Total deposits kept rising throughout the quarter, amounting to $18.7 trillion, up 1.5% sequentially.

As of Jun 30, 2021, the Deposit Insurance Fund (DIF) balance increased marginally from March 2021 level to $120.5 billion. Higher assessment income and interest earned on investment securities largely supported the growth in DIF balance.

No Bank Failures, Three New Banks

During the reported quarter, no banks failed, while three new banks were added. Further, 28 banks were absorbed following mergers.

As of Jun 30, 2021, the number of ‘problem’ banks was 51, down by four from the prior quarter. This number is close to historic lows. Total assets of the ‘problem’ institutions fell to $45.8 billion from $54.2 billion reported in the first quarter of 2021.

Our View

Though interest-rate cuts amid the coronavirus concerns and soft loan demand continue to adversely impact banks’ performance, solid economic revival is expected to offer support. Banks have been gradually easing their lending standards and changing revenue mix toward non-interest sources. These efforts are likely to help counter the pressure on the top line.

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