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FDIC-Insured Banks' Q3 Earnings Up, Loans Rise, NIM Shrinks

·5 min read

The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported third-quarter 2021 earnings of $69.5 billion, up 35.9% year over year. The improvement was primarily driven by negative credit costs and robust economic growth.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the September 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 and Wells Fargo WFC.

At present, JPMorgan, Bank of America, Citigroup and Wells Fargo carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Of all FDIC-insured institutions, 66.5% reported growth in quarterly net income, while the remaining registered a fall from the prior-year level. Also, the percentage of institutions reporting net losses in the quarter was 4.1% of all FDIC-insured institutions.

Banks’ earnings were driven by a rise in net operating revenues 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.

Community banks, constituting 91% of all FDIC-insured institutions, reported net income of $8.6 billion, up 19.6% year over year. Almost 65.8% of community banks witnessed a rise in net income.

The average return on assets in third-quarter 2021 improved to 1.21% from 0.97% as of Sep 30, 2020.

Net Operating Revenues & Expenses Rise

Net operating revenues came in at $210.409 billion, up 4.5% year over year.

Net interest income (NII) was $134.4 billion, up 4.4% year over year. Of all banks, 72.1% witnessed a rise in NII from the prior year.

Yet, net interest margin (NIM) contracted 12 basis points (bps) to 2.56%. Some big industry players like JPMorgan, Bank of America, Citigroup and Wells Fargo also witnessed a decline in NIM.

Non-interest income grew 4.7% to $76 billion. This upside mainly resulted from a rise in all other non-interest income and investment banking fees. Notably, 57.5% of all banks recorded growth in non-interest income.

Total non-interest expenses were $128 billion, increasing 3.6% from the prior-year quarter. The rise was mainly due to higher salary and benefit expenses and “all other noninterest expense.” Nearly 73.6% of banks witnessed higher non-interest expenses.

Credit Quality Improves

Net charge-offs (NCOs) were $5.3 billion, plunging 58.4% year over year and marking the fifth consecutive quarterly decline. The fall was primarily driven by lower NCOs for credit cards and commercial and industrial loans.

Provisions for credit losses were a negative $5.2 billion during the third quarter against provision costs of $14.4 billion in the year-ago quarter. Almost 58% of all institutions reported lower provisions.

The level of non-current loans and leases declined 19.2% from the year-ago quarter to $102.7 billion. The non-current rate was 0.94%.

Loans & Deposits Rise

As of Sep 30, 2021, total loans and leases were $10.9 trillion, growing marginally from the prior quarter. This marked the second quarterly increase since the second quarter of 2020. Rise in credit card loan balance (up 2.3%), 1-4 family residential mortgages (up 1.9%) and nonfarm non-residential commercial real estate loans (up 1.5%) were the key reasons for the improvement.

Total deposits kept rising throughout the quarter, amounting to $19.2 trillion, up 2.3% sequentially. Nearly 68.7% of all banks, including JPMorgan, Bank of America, Citigroup and Wells Fargo recorded a sequential rise in deposit balances.

As of Sep 30, 2021, the Deposit Insurance Fund (DIF) balance increased marginally from the June 2021 level to $121.9 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, 39 banks were absorbed following mergers, while one bank ceased operations.

As of Sep 30, 2021, the number of ‘problem’ banks was 46, down by five from the prior quarter. This number is close to historic lows. Total assets of the ‘problem’ institutions increased to $50.6 billion from $45.8 billion reported in the second quarter of 2021.

Our Take

Though interest-rate cuts amid the coronavirus concerns continue to adversely impact banks’ performance, solid economic growth and a gradual rise in loan demand are expected to offer support. Banks have been changing the revenue mix toward non-interest sources. These efforts are likely to help counter the pressure on the top line.

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