KKR

The U.S. banking industry finished 2015 with a strong fourth quarter but faces growing credit risk, particularly from loans related to energy and agriculture, according to the Federal Deposit Insurance Corp.

In its latest Quarterly Banking Profile, the FDIC said federally-insured commercial banks and savings institutions reported aggregate net income of $40.8 billion in the fourth quarter of 2015, up $4.4 billion (11.9%) from a year earlier.

The increase in earnings was largely attributable to a $2.7 billion decline in noninterest expenses, as itemized litigation expenses at a few large banks were $2.4 billion (80%) lower than a year ago.

Of the 6,182 insured institutions reporting fourth quarter financial results, the FDIC said, more than half (56.6 %) reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable in the fourth quarter fell from 9.9% a year earlier to 9.1%, the lowest level for a fourth quarter since 1996.

“Revenue and income were up from the previous year, overall asset quality continued to improve, loan balances increased, and there were fewer banks on the problem list,” FDIC Chairman Martin Gruenberg said in a news release.

But he also warned that banks “are operating in a challenging environment. Revenue growth continues to be held back by narrow interest [rate] margins. Many institutions are reaching for yield, given the competition for borrowers and low interest rates. And there are signs of growing credit risk, particularly among loans related to energy and agriculture.”

The average net interest margin (NIM) was 3.13%, slightly higher than the 3.12% average the year before, but most of the margin improvement occurred at larger banks, whose asset portfolios were better-positioned to benefit from the increase in short-term interest rates late in the quarter. Only 45% of all banks reported year-over-year NIM improvement.

Net charge-offs totaled $10.6 billion in the fourth quarter, an increase of $690 million (7%) from a year earlier and the first year-over-year gain in quarterly charge-offs in 22 quarters.

“As events unfold, banks must remain vigilant as they manage interest rate risk, credit risk, and evolving market conditions,” Gruenberg said.

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