Credit & Capital

Another Weak Quarter for U.S. Banks

Banks' net interest margins plummet; poor business loan performance pushes up delinquency and charge-off rates.
Vincent RyanAugust 25, 2020

While federal regulators are comfortable with the capital levels of U.S. banks, there’s no hiding the fact that financial institutions are starting to feel the economic backlash of the COVID-19 pandemic, as their profits fall and loan and lease losses creep upward.

For the 5,066 commercial banks and savings institutions insured by the FDIC, aggregate net income totaled $18.8 billion in the second quarter of 2020, down $43.7 billion (70%) from a year ago. The decline in net income was a continuation of uncertain economic conditions, which drove an increase in provision expenses, the FDIC said.

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.

Slightly less than half of all banks reported annual declines in net income, and the share of unprofitable institutions increased to 5.4%.

Lower interest earned on loans also contributed to the dismal quarter for banks. Banks’ average net interest margin fell by 58 basis points from a year ago to 2.81%, the lowest level ever reported in the FDIC’s quarterly banking profile.

Net interest income (the income earned from lending) fell by $7.6 billion (5.4%) from the second quarter of 2019, marking a third consecutive quarterly decline.

“Lower levels of business activity and consumer spending — combined with uncertainty about the path of the economy and the low interest-rate environment — contributed to higher provisions for loan and lease losses, as well as a decrease in net interest margins,” FDIC Chair Jelena McWilliams said. “Notwithstanding these disruptions, however, the banking industry maintained strong capital and liquidity levels at the end of the second quarter, which will protect against potential losses in the future.”

Total loan and lease balances at financial institutions rose by $33.9 billion (0.3%) from the previous quarter, helped by a 5.8% rise in commercial and industrial (C&I) loan portfolios. Most of the growth was driven by the implementation of the Paycheck  Protection Program, as $482.2 billion in credit was extended by the banking industry to businesses, the FDIC said.

Consumer loans, however, declined $67.1 billion due to reductions in credit card balances.

As to asset quality, the total noncurrent loan rate (loans 90 days or more past due or in nonaccrual status) rose by 15 basis points from the previous quarter to 1.08%, and total noncurrent loans increased by $15.9 billion (15.5%) from the previous quarter. The FDIC characterized those levels as relatively low. (In the years after the financial crisis, noncurrent loans peaked at 7.4%.)

The increase in noncurrent loan balances was led by 1–4 family residential mortgage loans (up $7.6 billion, or 19.5%) and C&I loans (up $6.1 billion, or 29%).

The total net charge-off rate for all loans rose by 7 basis points to 0.57% from a year ago, and net charge-offs increased by $2.8 billion (22%) from a year ago. The annual increase in total net charge-offs was mostly attributable to C&I loan portfolios, in which charge-offs increased by $2.4 billion (128.5%).

Total charge-off rates for U.S. banks reached about 3% after the financial crisis.

On the liability side, total deposit balances increased by $1.2 trillion (7.5%) from the first quarter. Noninterest-bearing account balances rose by $637 billion (17.7%) and interest-bearing account balances rose by $575.3 billion (5.4%).

During the second quarter, one new bank opened, 47 institutions were absorbed through mergers, and one bank failed.

Case Study: How Edgewood Tahoe’s CFO Saved 500 Jobs From the Ashes