US bank earnings up nearly 13 per cent in 3Q

WASHINGTON – U.S. banks’ earnings in the July-September period jumped nearly 13 per cent from a year earlier as continued growth in lending fueled interest income.

The data issued Tuesday by the Federal Deposit Insurance Corp. showed strength in the banking industry more than eight years after the financial crisis struck. However, the impact of low oil prices on energy companies led banks to continue to post bigger losses on commercial and industrial loans. Some energy companies have struggled to repay loans, causing distress for banks in oil and gas producing regions.

The FDIC reported that U.S. banks earned $45.6 billion in the third quarter, up from $40.4 billion a year earlier.

Almost 61 per cent of banks reported an increase in profit from a year earlier. Only 4.6 per cent of banks were unprofitable, down from 5.2 per cent in the third quarter of 2015 and the lowest percentage since the third quarter of 1997.

The FDIC said net interest income increased by $10 billion, or 9.2 per cent, from a year earlier.

As a sign of a healthy banking industry, the interest income earnings were boosted by a $112 billion, or 1.2 per cent, increase in lending in the third quarter. The largest increases came in mortgage lending and credit cards.

The volume of commercial and industrial loans that were written off in the third quarter jumped by $946 million, or 82.7 per cent.

Despite the relatively strong quarter, the banking industry “faces continued challenges,” FDIC Chairman Martin Gruenberg said at a news conference. He noted the sustained period of low interest rates in recent years which has crimped banks’ profit margins on loans.

Gruenberg added that “banks must position themselves for rising interest rates going forward.”

Since the surprise election of Donald Trump, long-term interest rates have climbed, propelled largely by investors’ belief that his plan to cut taxes and spend massively on roads, bridges, airports and other infrastructure could ignite inflation. When they foresee rising inflation, bond investors demand higher long-term rates and pay lower prices for bonds.

Banks could earn more interest on loans. On Wall Street, the anticipation of higher rates has helped push up prices of bank stocks — in some cases, to their loftiest levels in years. Also stoking the rise are expectations that regulations affecting the banking industry will be eased in a Trump administration.

More immediately, Federal Reserve policymakers are expected to raise the central bank’s benchmark rate at their Dec. 13-14 meeting for the first time in nearly a year. Fed Chair Janet Yellen recently told Congress that the case for a rate boost has “continued to strengthen.” She also indicated that the election of Trump hasn’t changed Fed thinking on the timing of the next rate increase.

Gruenberg has said that higher interest rates could be “a double-edged sword” for the banking industry. While bringing in more interest on loans, it also could increase the cost for banks to borrow to fund the loans they make.

The number of banks on the FDIC’s confidential “problem list” fell to 132 from 147 in the second quarter. The 132 banks requiring special monitoring by the agency’s examiners is the smallest number in more than seven years and is down sharply from the peak of 888 problem banks in the first quarter of 2011.

The number of bank failures continues to slow. So far this year, five banks have failed. Eight had been shuttered by this time last year. Failures declined from 24 in 2013 to 18 in 2014 and only eight last year. They are down sharply from 157 in 2010 — the most in one year since the height of the savings and loan crisis in 1992. Normally in a strong economy, an average of four or five banks closes annually.

The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had an $80.7 billion balance at the end of September, according to the FDIC. That was up from $77.9 billion at the end of June.

The FDIC was created during the Great Depression to insure bank deposits. It monitors and examines the financial condition of U.S. banks. The agency guarantees deposits up to $250,000 per account.

Gruenberg, who was appointed by President Barack Obama, said Tuesday he intends to remain as chairman of the independent agency in the Trump administration, to complete his term that expires in November 2017.

Other federal financial regulators are likely to be replaced by people chosen by Trump. The chair of the Securities and Exchange Commission, Mary Jo White, already has said that she will leave office at the end of the Obama administration in January. The new officials appointed by Trump are likely to lean toward softer regulation of Wall Street and the financial industry.