FDIC Says Bank Profits Rose in Third Quarter, Warns of Credit Risk

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By Jeff Bater

Nov. 24 — Profits of banks insured by the Federal Deposit Insurance Corporation rose in the third quarter, but the regulator warned the industry to pay attention to growing credit risk.

In its quarterly report on earnings, the FDIC said its regulated banks and savings institutions reported aggregate net income of $40.4 billion, which was $1.9 billion, or 5.1 percent, higher than earnings during the same period a year earlier.

Most of the year-over-year improvement in industry earnings came from a decline in litigation expenses at a few large banks. Still, the FDIC report also showed nearly 60 percent of the 6,270 insured institutions reporting third-quarter financial results had year-over-year growth in quarterly earnings.

The 5,812 insured institutions identified as community banks reported $5.2 billion in net income in the third quarter, an increase of 7.5 percent from the third quarter of 2014. “Their revenue and income growth outpaced the rest of the industry, and loan portfolios at community banks grew at a faster rate than at larger institutions,” said Martin Gruenberg, the FDIC's chairman.

Most Indicators Improve

Most performance indicators in the report continued to show improvement, he said, while quickly pointing out the challenges facing the industry. Gruenberg said that while bank earnings and capital have gone up since the financial crisis, revenue has been relatively flat despite increased lending activity.

“Revenue growth for the industry as a whole has been modest since 2009,” he said. “This is partly a reflection of the challenging interest-rate environment.”

In the environment of low rates, interest-rate risk and credit risk have increased, amid competitive lending conditions.

“History tells us that it is during this phase of the credit cycle when lending decisions are made that could lead to future losses,” Gruenberg said. “Timely attention by banks to address these growing risks will benefit banks and contribute to the sustainability of the current economic expansion.”

Warnings on Risk

Another regulator, Thomas Curry, who is comptroller of the currency and a fellow FDIC board member, told banks and supervisors during a speech in October to step up their vigilance over credit risk, calling attention to growing exposures in commercial real estate loans and warning about subprime automobile lending (204 BBD 204, 10/22/15). Curry had said that after several years of steady loan growth, banks are reaching out to less creditworthy borrowers, and that the industry is reaching a point in the cycle where credit risk is “moving to the forefront.”

Gruenberg said that as loan growth has picked up, supervisory surveys have noted a relaxation in underwriting standards in some loan portfolios, including auto and multifamily housing portfolios. Federal banking regulators' latest review of large syndicated loans detected a significant increase in leveraged lending volumes, and found that falling energy prices have the potential to hurt the performance of a growing number of loans to oil and gas explorers and producers.

As for interest-rate risk, Gruenberg said asset maturities have been going up since 2009 — yet there has been no comparable increase in the share of longer-term funding. “The growing mismatch between asset and funding maturities has left banks more vulnerable to rising interest rates,” he said.

Industry Says Quarter Strong

The American Bankers Association (ABA) said in a statement that robust loan growth was the driving factor behind “another strong quarter for America's banking industry.” The report showed that total loan and lease balances rose 5.9 percent year over year, the fastest annual pace of growth since 2008.

James Chessen, chief economist for the ABA, said banks are “well prepared to manage what is expected to be a slow and gradual increase in interest rates by the Fed.”

“This gives institutions ample time to adjust while low interest rates will continue to attract business borrowers,” he said.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com

For More Information 
The FDIC material can be seen at http://src.bna.com/beK.