While U.S. banks continue to complain about being handcuffed by regulations, they are seeing enormous growth in profits.
The Federal Deposit Insurance reported on Thursday that commercial banks and savings institutions had aggregate net income of $60.2 billion in the second quarter, up 25% from a year ago. More than 70% of the 5,542 banks reporting to the FDIC scored year-over-year earnings growth, and the ranks of unprofitable banks shrank to 3.8% from 4.3%. (The number of “problem banks” also fell, by 10, making that list the shortest it has been (82 banks) since the fourth quarter of 2007.
“It is worth noting that the current economic expansion is the second longest on record, and the nation’s banks are stronger as a result,” said FDIC Chair Jelena McWilliams.
Higher net interest income and fee income, coupled with a lower effective tax rate, contributed to the increase in the industry’s profits. The lower federal tax rate gave bank earnings a charge, as the FDIC estimated that at the old effective tax rate second-quarter net income growth would have been halved.
As the Federal Reserve raises interest rates, the average yield banks are seeing on loans is outpacing growth in funding costs. The interest income banks earned on loans rose $134 billion in the second quarter up nearly 9% from a year ago. T,hat’s the largest annual dollar increase every reported by banks. Average net interest margin, which was depressed coming out of the financial crisis, rose again, to 3.38% from 3.22% a year ago.
Banks’ funding costs are gradually increasing as they are forced to raise deposit rates. The highest rates in the United States on five-year certificates of deposit, for example, cracked 3% this month.
All major loan categories registered growth last quarter, growing 4.2% from last year. Banks’ loan portfolios are also performing relatively well. Noncurrent loans fell by $7.7 billion (6.8%) from the first quarter, led by residential mortgages and commercial and industrial loans. But net charge-offs rose by $447 million (4%). Leading the deterioration were credit cards, which saw a $191 million (13%) increase in chargeoffs from a year ago.
TransUnion reported this week that the number of U.S. consumers with access to card credit grew to an all-time high of 176 million in the second quarter, up 2.2% from the previous year. Credit card balances rose 5.8%.
TransUnion said the growth in balances was seen across all “risk tiers, with super-prime borrowers experiencing the highest growth rate at 8.4%” But credit card originations to subprime borrowers were up 4%.
In the coming months, “the competition to attract loan customers will be intense, and it will remain important for banks to maintain their underwriting discipline and credit standards,” said McWilliams. She also noted that as an industry, banking “must continue to position itself to be resilient through economic cycles.”