Profit & Loss

Banks’ Expenses Growing, But Not Their Incomes

The formula for banks' lower profits: three rate cuts by the Fed, yield-curve inversions, and higher salary and benefits costs.
Vincent RyanFebruary 26, 2020
Banks’ Expenses Growing, But Not Their Incomes

Commercial banks and savings institutions were under some earnings pressure in the fourth quarter of 2019: interest income fell but personnel costs and other operating expenses rose.

The FDIC’s quarterly profile of the performance of 5,177 banks showed that aggregate net income declined almost 7% last quarter, to $55.2 billion (see chart at bottom). Full-year net income for 2019 dipped by 1.5%.

A Better Way to Do Ecommerce

A Better Way to Do Ecommerce

Learn how Precision Medical leveraged OneWorld to cut the cost of billing in half and added $2.5M in annual revenue.

Quarterly noninterest expenses, meanwhile, rose 3.2% year-on-year in aggregate, and 67% of the financial institutions reported annual cost increases. The bulk of the increases (80%) came from higher salaries and employee benefits.

Lower interest rates mean banks are earning less on loans, as the average net interest margin declined by 20 basis points in the fourth quarter, to 3.28%. Net interest income fell by 2.4% from a year ago. It was the first year-on-year drop for net interest income since the third quarter of 2013. Over the course of 2019, banks also saw a lower average return on assets.

“During the second half of 2019, we saw three reductions in short-term interest rates and yield-curve inversions,” said FDIC chair Jelena McWilliams. “These factors present challenges for banks’ credit extension and funding. It is vital that banks maintain careful underwriting standards and prudent risk management in order to maintain lending through economic fluctuations.”

Aggregate loan and lease balances rose by $117.9 billion (1.1%) in the fourth quarter, with all loan categories, except commercial and industrial (C&I) loans, growing. Consumer loans (including credit cards) grew 3.3% in the fourth quarter, followed by nonfarm residential loans (up 1.4%) and residential mortgages (up 0.9%).

Despite the growth in assets, noncurrent loans (90 days or more past due) were relatively stable, with the exception of credit card loans, which saw a 10.3%  quarterly increase. Net charge-offs also grew, by 10.4%. In aggregate, banks also boosted their loan-loss reserves for credit card portfolios by 1.9%.

The Fed’s senior loan officer survey in February noted some banks tightening standards for credit card loans, mostly via lower limits and higher minimum credit scores. A significant portion of the banks surveyed also said they saw weaker demand for C&I loans.

4 Powerful Communication Strategies for Your Next Board Meeting