WASHINGTON — Profits soared and allowances for loan-losses fell at U.S. banks in the first quarter even as net interest margins continued to shrink.
The banking industry produced net income of $76.8 billion in the quarter, up 29% from the fourth quarter and 315% from a year earlier, according to the Federal Deposit Insurance Corp.'s latest Quarterly Banking Profile.
The recent gains were driven by declines in the reserves built up by banks in the earlier months of the pandemic. For the first time, the industry recorded negative provisions for credit losses of $14.5 billion.
FDIC Chairman Jelena McWilliams said the banking sector is strong, though challenges remain on the horizon.
“The banking industry reported strong earnings in first quarter 2021 as the economic recovery continued,” McWilliams said. “At the same time, the persistent low-interest-rate environment and a decline in loan volume caused further contraction in the average net interest margin, which reached a new record low.”
Banks' combined net interest income fell 5.6% to $129.7 billion in the first quarter of 2021. However, the FDIC reported that nearly 65% of banks reported higher net interest income compared with the first quarter of 2020.
Overall, the industry’s net interest margin declined 57 basis points year over year to 2.56%, which was “the lowest level on record in the Quarterly Banking Profile,” the agency wrote. The previous record was 2.68% in the
Total loan and lease balances fell on an annual basis for the first time since the third quarter of 2011, according to the FDIC. They dropped 1.2% year over year to $10.82 trillion as of March 31 this year. The decline was thanks largely to a 12.8% drop in credit card balances and a 3.7% drop in commercial and industrial lending.
“This was the largest percentage reduction in credit card commitments since first quarter 2009,” according to the QBP.
Meanwhile, deposit growth stayed brisk. Deposits swelled by $635 billion, or 3.6%, between the fourth quarter of 2020 and the first of 2021, bringing the sector’s total to $18.5 trillion.
In the same period, the Deposit Insurance Fund balance grew by $1.5 billion to $119.4 billion. Still, the sector’s deposit growth pushed the reserve ratio down four basis points to 1.25%, placing it 10 basis points below the statutory minimum of 1.35% The FDIC stressed that the decline was “solely because of strong insured deposit growth.”
The FDIC said that the agency has eight years to bring the DIF's reserve ratio back up to the statutory minimum after it fell below the limit starting in the second quarter of 2020.
"These things don't happen overnight," McWilliams said during a press conference Wednesday. Pointing to the sector's
