The Federal Deposits Insurance Company (FDIC), which insures US commercial banks and savings entities, publishes a quarterly report on the institutions it oversees. Its most recent report gave the markets something to cheer—or would have if the report could have got a hearing over the deafening noise made by an impending Greek exit from the eurozone and by Spanish debt rates climbing into the unsustainable zone.
The FDIC reported a 22.9% improvement in net income for those organizations it insures, up $6.6 billion to $35.3 billion, over the first quarter 2011 figures. The important point is that this is the highest quarterly net income reported by the industry since the second quarter of 2007, which is about when the global economy went into a tailspin. The entire sector had until this point managed only one instance where the quarterly return on assets rose above the 1% threshold, namely Q3 2011. The first quarter of 2012 not only chalked up the second such instance, but also extended a 10-quarter, year-on-year improvement in net income, making this the 11th such quarter.
Of the institutions followed by the report, only 10.3% were unprofitable, while 67.6% reported an increase in their profit by comparison with the same quarter in 2011. You have to go back to the second quarter of 2007, just pre the crash, to find a lower percentage level for the number of banks and savings institutions not making a profit. At the same time, banks are reporting that they are making fewer provisions for loan-and-lease losses, which declined by $6.6 billion (down 31.6%) of the provisioning being made for the comparable quarter in 2011. At the same time, banks added to their capital in the quarter, with overall bank equity increasing by $18.1 billion, and Tier 1 leverage capital rose by $15.1 billion, with retained earnings making a $14.3 billion contribution to the increase in capital.
What seems clear is that US banks—the negative press attracted by JP Morgan's $2 billion trading loss notwithstanding—are in much better shape than their European counterparts. Their Tier 1 risk-based capital ratio hit a new record high of 13.28%, while the average levels of all three regulatory capital ratios rose through the quarter.
While acknowledging that the FDIC report “paints a dramatically improving picture” for US banks, with many headline statistics in the report at their highest levels since 2007, David Benoit, writing in the Wall Street Journal, argues that the report does contain one important piece of bad news. Total loan and lease balances fell by $56.3 billion through the quarter. Bank loans are a fundamental part of corporates increasing their profitability and if bank lending is down that signals a possible retraction in the economy. “Loan balances in the FDIC report had grown for three straight quarters before this,” Benoit says, and that growth in lending was frequently hailed as a sign that things were improving. However, at his news presentation, FDIC acting chairman Martin Gruenberg warned that commentators should exercise caution about over-analysing one quarter's drop in lending and extrapolating it into a trend.
The good news is that US banks have done a much better job, in general, in boosting their capital, by comparison with their European counterparts and most have little or no exposure to the troubled eurozone sovereign debt issues. The big five (which includes Citigroup and Goldman Sachs) have considerable exposure through writing large amounts of credit default swaps business, in effect guaranteeing European banks' holdings of dodgy eurozone peripheral debt. That may yet rise up to haunt the US banking system, particularly if Spain or Italy were to go the way of Greece (whether Greece exits or not, it has in effect already defaulted on its debt). However, that worry should not be allowed to spoil a solid quarter's score sheet for the financial sector from the FDIC.
Further reading on US banks
- Foreclosure-gate and the US banks by Anthony Harrington
- Risk Management at a Crossroads by Maureen J. Miskovic
- Are bailouts inevitable for large US and European banks? by Anthony Harrington
Tags: European banks , FDIC , Federal Deposit Insurance Corporation , Greek exit , stock markets , us banks