WASHINGTON — Bank profits declined in the first quarter as the country’s largest banks grew set-aside funds amid economic and political uncertainty, according to the Federal Deposit Insurance Corp.'s Quarterly Banking Profile.
Profits dropped 22.2%, or $17 billion, from a year earlier. Larger banks, especially, started setting aside additional funds to guard against economic risks such as inflation and rising interest rates, a reversal of the recent trend of banks releasing their COVID-19 financial cushions.
Provision expenses increased $19.7 billion from the same quarter last year.
Acting FDIC Chairman Martin Gruenberg said that with rising interest rates leading to “high levels of unrealized losses in the banking industry’s securities portfolios,” the agency is keeping closer tabs on banks’ books.
“Although the banking industry currently reports high liquid asset levels, the elevated levels of unrealized losses could increase the risk of actual losses should banks sell investments at a loss to meet liquidity needs in the future,” he said.
Gruenberg added that interest rate increases could lower real estate values, among other asset concerns, and “limit loan repayment ability.” Those developments will be “matters of ongoing supervisory attention” from the agency in the coming year, he said.
“We’re particularly focused on commercial real estate and other assets that are being held on the books of the banks,” Gruenberg said.
The banking industry also continued to see strong growth in insured deposits, causing the FDIC to consider amending its 2020
“A key assumption surrounding the restoration plan was that insured deposit growth would normalize and the surge of insured deposits associated with the pandemic would recede over time,” Gruenberg said. “However, more than one year after the most recent round of pandemic-related fiscal stimulus, the industry has continued to report strong insured deposit growth.”
In the first quarter, loan balances increased 1%, according to the Quarterly Banking Profile, driven largely by more lending in the commercial and industrial category. Noncurrent loan balances continued their decline, falling 4.5% in the first quarter. Net interest margin fell 1 basis point to 2.54%.
The banking industry’s reaction to the report was largely positive, despite the drop in net income and high unrealized losses on investment securities.
“Banks increased loan-loss provisions in the first quarter due to heightened uncertainty, which lowered industry net income,” Sayee Srinivasan, chief economist at the American Bankers Association, said in a statement. “Nonetheless, banks are well capitalized and the industry remains well positioned to handle the challenges caused by the Fed’s efforts to combat inflation.”
Consumer Bankers Association President and CEO Richard Hunt said that banks are demonstrating resilience as they deal with high inflationary pressures.
“Strong liquidity levels, coupled with modest improvements in credit quality and loan growth, indicate banks will continue to be well positioned to drive our economic recovery forward,” he said in a statement.
No banks failed in the first quarter. The number of banks on the “problem bank list” dropped by four to 40 banks, but the assets held by problem banks
Gruenberg said the amount of assets managed by problem banks isn’t a problem “at this time.”
“From an aggregate perspective, it does not as of yet appear to present a particular issue,” he said.
The Quarterly Banking Profile is Gruenberg’s second since taking over as acting head of the agency since
Last week, the FDIC outlined its enforcement power over agencies
“We were specifically focused on nonbank companies, including crypto, and other nonbank firms that might have an incentive to represent deposit insurance when it may not be the case,” Gruenberg said after the release of the quarterly report. “Certainly crypto firms would fall within that category, but we want to pay close attention to the broader universe as well.”
The deadline for comments for the FDIC’s request on bank merger policy is also fast approaching. Recently, Michael Hsu, acting director of the Office of the Comptroller Currency, has
“That’s a matter of attention for us as well,” Gruenberg said. “A large regional bank merger can present challenges, issues in resolution if one should fail or even potential financial stability risks.”
