U.S. banks returned to profit growth in the second quarter amid strong loan demand but the energy sector continues to cast a cloud over consumer and commercial lending.
In its latest Quarterly Banking Profile, the Federal Deposit Insurance Corp. said federally-insured commercial banks and savings institutions reported aggregate net income of $43.6 billion in the second quarter, up $584 million (1.4%) from a year earlier. In the first quarter, earnings had dipped for the first time in two years.
The second-quarter report provided other causes for optimism, including a decline in the number of financial institutions on the FDIC’s “problem list” to 147, the lowest in more than seven years. The proportion of banks that were unprofitable fell to 4.5% from 5.8% a year earlier, the lowest percentage since the first quarter of 1998.
FDIC Chairman Martin J. Gruenberg noted that the regulator’s insurance fund reserve ratio reached 1.17% of financial institutions’ estimated insured deposits, surpassing the 1.15% threshold mandated under the 2010 Dodd-Frank financial reforms.
As a result, the 93% of institutions that have less than $10 billion in assets will lower premiums into the fund starting in the current quarter. “This marks a significant milestone for the fund,” Gruenberg said, noting that it fell into negative territory after the financial crisis.
As The Wall Street Journal reports, the rise in second-quarter net income reflected in part a $5.2 billion increase in net interest income and a $981 million decline in expenses for litigation set aside at a few large banks.
Community banks fared particularly well, collectively posting a 9% year-over-year increase in earnings. Loans and leases at community banks increased 9.1% and net operating revenue rose 7.1%.
But Gruenberg also said banks “are still operating in a challenging environment,” citing “persistent stress” in the energy sector that “has resulted in a decline in asset quality at banks that lend to oil and gas producers.
“We likely have not yet seen the full impact of low energy prices on the banking industry, particularly for consumer and C&I loans in energy-producing regions of the country,” he warned.