U.S. banks’ profits plunged in the first quarter as firms boosted loan-loss reserves to guard against defaults amid the coronavirus pandemic.
In the first government survey of the industry since the pandemic shut down large parts of the economy, the Federal Deposit Insurance Corp. said net income for 5,112 FDIC-insured institutions dropped 69.6% to $18.5 billion.
Just over half of firms reported year-over-year net income declines and the total share of unprofitable institutions jumped to 7.3%.
Banks were “forced to divert much of the earnings to protections for newly risky loans as the coronavirus tanked credit health and plunged the U.S. into a recession,” Business Insider said.
Defensive reserves leaped to $197 billion from $125 billion in the year-ago period, according to the FDIC, and banks set aside $38.8 billion to cover potential loan losses in the future, up nearly 280% from the year prior.
The amount of non-current loans rose 7.3% from the previous quarter, the biggest increase since 2010, the FDIC said.
Despite the profit plunge, FDIC Chairman Jelena McWilliams said banks had been a “source of strength for the economy.”
“Although bank earnings were negatively affected by increases in loan loss provisions, banks effectively supported individuals and businesses during this downturn through lending and other critical financial services,” she said in a news release.
“At the end of the first quarter, bank capital and liquidity levels remain strong, asset quality metrics are stable, and the number of ‘problem banks’ remains near historic lows,” McWilliams added.
The number of firms on the FDIC’s “Problem Bank List” increased to 54 from 51.
Community banks followed the industry trend as loan-loss provision expenses jumped to $1.8 billion in the first quarter, three times the level reported in 2019. Overall net income sank 20.9% from the year-ago period.