Dismal 1Q Earnings for FDIC-Insured Banks - Analyst Blog

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Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported first-quarter 2014 earnings of $37.2 billion, lagging the year-ago earnings of $40.3 billion by 7.6%. This is the second time in the last 19 quarters that banks recorded a decline in net income on a year-over-year basis.

Notably, Community banks constituting 93% of all FDIC-insured institutions, reported net income of $4.4 billion, down 1.5% year over year.

Overall, during the first quarter, the banking industry witnessed a gradual improvement. The number of troubled assets and institutions significantly dipped, which is encouraging.

Further, asset quality improved and slight loan growth was recorded. However, banks' revenue was impacted by lower margins. Further, decline in non-interest income was experienced as trading income subdued and higher interest rates reduced mortgage-related activity.

Banks with assets worth more than $10 billion contributed a major part of the earnings in the said quarter. Though such banks constitute merely 1.6% of the total number of U.S. banks, these accounted for approximately 82% of industry earnings.

Such major banks include Wells Fargo & Company WFC, Citigroup Inc. C, JPMorgan Chase & Co. JPM and Bank of America Corporation BAC.

Performance in Details

Banks are striving to reap profits and are consequently bolstering their productivity.Around 54% of all institutions insured by the FDIC reported improvement in their quarterly net income, while the remaining number recorded a decline in comparison to the prior-year quarter. Moreover, the percentage of institutions reporting net losses for the quarter slumped to 7.3% from 8.5% in the last-year quarter.

The measure for profitability or average return on assets (ROA) fell to 1.01% from 1.12% in the prior-year quarter. The average return on equity (ROE) decreased to 8.99% from 9.96%.

Net operating revenue was $163.7 billion, down 4% year over year. The decrease was due to a fall in non-interest income, partially offset by a modest increase in net interest income.

Net interest income was recorded at $104.2 billion, up 0.3% year over year. The average net interest margin declined to 3.17%, from 3.27% in the prior-year quarter.

Non-interest income declined 10.7% year over year to $59.5 billion for the banks. Notably, income from sale, securitization and servicing of 1-to-4-family home mortgages suffered a fall. Further, trading revenue decreased 18.3% year over year. Total non-interest expenses for the institutions were $102.3 billion in the quarter, almost stable on a year-over-year basis.

Credit Quality

Overall, credit quality considerably improved in the reported quarter. Net charge-offs fell to $10.4 billion from $15.9 billion in the first quarter of 2013. Notably, all major loan groups recorded a year-over-year decline in charge-offs.

In the quarter, provisions for loan losses for the institutions came in at $7.6 billion, down 30.3% year over year. The reported figure represents the 18th consecutive decline in quarterly loan loss provisions. Notably, 42% of all banks decreased their provisions.

The level of non-current loans and leases (those 90 days or more past due or in non-accrual status) declined 5.8% sequentially to $195.1 billion. Moreover, the percentage of non-current loans and leases fell to 2.46%, which was the lowest since the third quarter of 2008 (2.35%).

Balance Sheet

The capital position of the banks was strong. Total deposits continued to rise and were recorded at $14.9 trillion, up 3.3% year over year. Further, total loans and leases came in at $7.9 trillion, up 3.6% year over year.

As of Mar 31, 2014, the Deposit Insurance Fund (DIF) balance increased to $48.9 billion from $47.2 billion as of Dec 31, 2013. Moreover, assessment revenues primarily drove the growth in fund balance.

Bank Failures and Problem Institutions

During the first quarter of 2014, 5 insured institutions failed compared with 4 failures in the prior-year quarter. As of Mar 31, 2014, the number of "problem" banks declined from 467 to 411, reflecting the twelfth consecutive quarter of decrease. Total assets of the "problem" institutions also fell to $126.1 billion from $152.7 billion.

Our Viewpoint

Though decline in the number of problem institutions is encouraging, the quarter remained challenging with dreary consumer and corporate activities, soft trading volumes, sluggish mortgage banking activities, and high legal costs. Moreover, top-line growth remains uncertain as a dearth of significant loan growth (primarily the home equity lines of credit) and pressure on net interest margins from a nagging low rate environment prevail.

However, banks have been gradually easing their lending standards and trending toward higher fees to dodge the pressure on the top line. Then again, continued expense control and stable balance sheets should act as tailwinds in the upcoming quarters. Further, a favorable equity and asset market backdrop, and favorable macroeconomic factors – such as falling unemployment, a progressive housing sector and flexible monetary policy – should pave the way for stability.

With lingering uncertainty in the economy, we don't see this issue-ridden sector returning to its pre-recession peak anytime soon. What encourages us though is that the U.S. banks are getting accustomed to increased legal and regulatory pressure and resorting to safer alternatives for higher earnings. This indicates their ability to better encounter challenges and grow at a moderate pace. However, structural changes in the sector will continue to impair business expansion and investor confidence for some time.


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BANK OF AMER CP BAC: Free Stock Analysis Report

CITIGROUP INC C: Free Stock Analysis Report

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WELLS FARGO-NEW WFC: Free Stock Analysis Report

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