Financial Performance

Bank Profits Rise as Interest Spread Hits 3.3%

Average net interest margin reached its highest level since late 2012 as banks continued to benefit from rate hikes.
Matthew HellerNovember 22, 2017

U.S. banks’ profits rose 5.2% in the third quarter as the average net interest margin reached its highest level in nearly five years.

In its latest Quarterly Banking Profile, the Federal Deposit Insurance Corp. said federally-insured commercial banks and savings institutions reported aggregate net income of $47.9 billion, slightly below the second quarter’s record $48.3 billion.

Net interest income rose 7.4% to $8.8 billion while noninterest income declined 1% to $639 million.

Banks have been benefiting from an increase in net interest margins as short-term interest rates rise. The Federal Reserve has hiked its benchmark rate four times since 2015 and is expected to vote for another increase next month.

In the third quarter, banks’ average net interest margin rose to 3.30% from 3.18% a year earlier — the highest level since the fourth quarter of 2012. It hit a post-financial crisis low of 3.02% in the first quarter of 2015.

In other positive signs for the industry, average return on assets rose to 1.12% from 1.10% a year earlier and more than two thirds of all banks — 67.3% — reported year-over-year increases in their ROAs.

The number of “problem banks,” meanwhile, fell to 104 from 105, the smallest number since March 31, 2008 and nearly 90% less than the post-crisis peak of 888 in the first quarter of 2011.

“Third-quarter results for the banking industry were largely positive,” FDIC Chairman Martin J. Gruenberg said in a news release.

He warned, however, that the industry continued to see a gradual slowdown in the annual rate of loan growth and the operating environment for banks remains “challenging.”

“An extended period of low interest rates and an increasingly competitive lending environment have led some institutions to reach for yield,” Gruenberg noted. “This has led to heightened exposure to interest-rate risk, liquidity risk, and credit risk. These risks must be managed prudently for the industry to continue to grow on a long-run, sustainable path.”