U.S. Banks See Slower Loan Growth, Higher Charge-Offs

However, a higher federal funds rate boosted net interest income at large banks, leading to a 12.7% rise in profits.
U.S. Banks See Slower Loan Growth, Higher Charge-Offs

FDIC-insured banks reported that the pace of loan growth slowed in the first quarter and that charge-offs on loans to individuals increased. But banks still recorded robust earnings for the period.

Total loans and leases fell by $8.1 billion, or 0.1% year-over-year, in the three months ended March 31, led by credit card loans, which posted a seasonal decline of $43.7 billion, or 5.5%. In its Quarterly Banking Profile, released on Wednesday, the FDIC attributed the decline to cardholders paying down outstanding balances, but residential mortgages also fell, by 0.5%. Credit to businesses offset some of the decline, with commercial and industrial loans up 1.3% and commercial real estate loans rising 1.7%.

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Loans, Banks, CRE LendingFailed consumer loans also dinged banks’ balance sheets. Banks charged off $11.5 billion of loans in total in the first quarter, an increase of 13.4%. Net credit card charge-offs rose 22.1%, while auto loan charge-offs increased nearly 28%. Charge-offs of “other loans to individuals” increased a whopping 66.4%.

But trends in noncurrent loan balances — the amount of loans and leases 90 days or more past due — do not suggest the bulk of consumers are having a hard time paying back credit. Noncurrent loans at banks fell by $7 billion, or 5.3%, in the first quarter, led by declines in noncurrent mortgages (8.2%) and C&I loans (4.6%).

In total, FDIC insured banks reported net income of $44 billion in the first quarter, up 12.7% year over year. More than 57% of all banks reported year-over-year increases in quarterly earnings, while only 4.1% reported negative net income for the quarter.

The positive income trend was boosted by a 7.8% increase in net interest income. The average net interest margin improved to 3.19%, up from 3.1% a year ago. However, for the most part, large banks were the beneficiaries, “as higher short-term interest rates lifted average asset yields,” said the FDIC.

Smaller banks, which have a bigger share of their assets in longer-term investments, did not see their net interest margins benefit from the rise in short-term rates, according to the FDIC. Indeed, more than half of all FDIC-insured banks — 53.7% — reported lower net interest margins than a year ago.

Banks saw their noninterest expenses, which eat into profits, increase from a year ago. Salary and employee benefits costs were a big driver, rising $3.3 billion (6.6%). Part of that increase was due to a larger workforce: banks reported 41,469 more employees than a year ago.

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