Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported fourth-quarter 2016 earnings of $43.7 billion, up 7.7% year over year. Notably, community banks, constituting 93% of all FDIC-insured institutions, reported net income of $5.3 billion, up 10.5% year over year.
Banks’ earnings were driven by higher revenues, loan growth and lower loan-loss provisions. Moreover, improved trading revenue remained another positive. On the other hand, expenses flared up.
Banks, with assets worth more than $10 billion, contributed a major part of the earnings in the said quarter. Though such banks constitute only 1.8% of the total number of U.S. banks, these accounted for approximately 80% of the industry’s earnings. Leading names in the space include Wells Fargo & Co. WFC, Bank of America Corp. BAC, Citigroup Inc. C and U.S. Bancorp USB.
Among the above mentioned banks, Wells Fargo and Citigroup carry a Zacks Rank #3 (Hold), while BofA and U.S. Bancorp carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
For 2016, FDIC reported net income of $171.3 billion, up 4.9% year over year. Net income for community banks totaled $21.4 billion in 2016, up 10.1% year over year.
Revenues Escalate, Costs Up Slightly
Banks have been persistently striving to reap profits and are consequently boosting productivity. Around 59% of all institutions, insured by the FDIC, reported improvement in their quarterly net income, while the remaining recorded a decline in comparison to the prior-year quarter. Moreover, the percentage of institutions reporting net losses for the quarter edged down to 8.1% from 9.6% in the last-year quarter.
The measure for profitability or average return on assets (ROA) inched up to 1.04% from 1.02% in the prior-year quarter.
Net operating revenue was $181.8 billion, up 4.6% on a year-over-year basis. A rise in net interest income was the driving factor.
Net interest income was recorded at $119.3 billion, up 7.6% year over year, driven by a rise in interest-bearing assets and net interest margin (NIM). NIM advanced to 3.16% from 3.12% in the year-ago quarter.
Non-interest income for the banks declined slightly year over year to $62.4 billion. Decrease in income from changes in fair values of financial instruments and lower interchange fees led to the decline. Notably, an increase in trading revenues and servicing income was recorded.
Total non-interest expenses for the establishments were $108.2 billion in the quarter, up 2.6% on a year-over-year basis.
Credit Quality: A Concern?
Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $12.2 billion, up 13.5% year over year, reflecting the fifth quarterly rise. Notably, all major loan groups recorded a year-over-year rise in charge-offs, except residential mortgage loans.
In the quarter under review, provisions for loan losses for the institutions came in at $12.2 billion, down 19.7% year over year. The level of non-current loans and leases decreased 4.6% year over year to $131.6 billion, indicating the 26th decline in non-current loan balances in the last 27 quarters. The non-current rate was 1.41%.
Strong Loan & Deposit Growth
The capital position of the banks was solid. Total deposits continued to rise and were recorded at $12.9 trillion, up 5.8% year over year. Further, total loans and leases were $9.3 trillion, up 5.3% year over year.
As of Dec 31, 2016, the Deposit Insurance Fund (DIF) balance increased to $83.2 billion from $72.6 billion as of Dec 31, 2015. Moreover, interest earned on investment securities and assessment income primarily led to the growth in fund balance.
Fewer Bank Failures, Shrinking Problem Institutions
During fourth-quarter 2016, none-insured institutions failed. As of Dec 31, 2016, the number of "problem" banks declined from 132 to 123, highlighting the lowest number in approximately more than seven years and significantly decreased from 888 recorded in first-quarter 2011. Total assets of the "problem" institutions increased slightly to $27.6 billion from $24.9 billion.
The decline in the number of problem institutions looks encouraging with the quarter witnessing top-line growth with higher NIM. Banks have been gradually easing their lending standards and trending toward higher fees to counter pressure on the top line. In addition, more interest rate hikes will dodge the pressure on interest income. Then again, consistent expense control and stable balance sheets should act as tailwinds in the upcoming quarters.
With lingering uncertainty in the economy, we do not see this issue-ridden sector returning to its pre-recession levels anytime soon. What encourages us though is that the U.S. banks are getting accustomed to increased legal and regulatory pressure, and hence resorting to safer alternatives for higher earnings. This indicates their ability to better encounter challenges and grow at a moderate pace.
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