U.S. bank profits fell in the third quarter amid a slowdown in shrinkage of loan loss provisions.
The Federal Deposit Insurance Corporation reported Tuesday that aggregate net income for insured institutions dropped 1.2% to $69.5 billion in the first three months of 2021 from the second quarter.
But year over year, profits rose 35.9%, reflecting continued economic growth, improved credit conditions and a $19.7 billion decline in loan loss provision expense. A year ago, banks were rushing to set aside funds to guard against pandemic-driven loan losses.
“With strong capital and liquidity levels to support lending and protect against potential losses, the banking industry continued to support the country’s needs for financial services while navigating the challenges presented by the pandemic,” FDIC Chairman Jelena McWilliams said in a news release.
Since the end of 2020, banks have been lowering loan loss provisions, according to Reuters. But the rate of decline slowed in the third quarter to negative $5.2 billion from negative $10.8 billion in the second quarter.
As banks reduced those reserves, the rate of non-current loans dropped to 6.3%, while the net charge-off rate for loans not expected to be paid back dropped to their lost level on record, 0.19%, per the report.
Year-to-date loss provisions in 2021 totaled negative $30.5 billion, well below the $132.6 billion in provision expenses incurred in 2020.
The average net interest margin declined by 12 basis points year-on-year in the third quarter to 2.56%, but rose six basis points from a record low last quarter. A decline in interest expense drove a $5.6 billion improvement in net interest income.
Improvements in net interest income were widespread, as nearly three-quarters of banks (72.1%) reported higher income compared with a year ago.
According to the FDIC, banks offset low net interest margins by continuing to increase investments in longer-term loans and securities. The share of longer-term assets rose during the quarter, led by an increase in loans and securities with maturities of greater than five years to 31% of total assets, up from 28% in the fourth quarter of 2019.