Banks ride tax law to record $56B in profits

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WASHINGTON — Higher operating revenue and a lower corporate tax rate helped drive a large earnings quarter for the banking industry at the start of 2018 as net income rose more than 27% from a year earlier to $56 billion.

The Federal Deposit Insurance Corp.’s first-quarter report on the industry’s health painted a picture of better loan spreads thanks to higher net interest margins, and of growth in noninterest income as well. But according to the agency’s Quarterly Banking Profile, banks also benefited significantly from the recent tax reform law, which lowered the corporate tax rate from 35% to 21%. Without the lower rate, the FDIC said, net income would have been below $50 billion.

Less than 4% of institutions did not report a profit in the quarter, which was the lowest level since 1996, the agency said. Net interest income grew by 8.5% from a year earlier to $131.3 billion, and was higher for more than four out of five banks. The industry’s average net interest margin rose by 13 basis points to 3.32% and interest-bearing assets rose by 3.6%.

Growth in noninterest income was also steady. Thanks to a nearly 15% spike in trading revenue from a year earlier, total noninterest income rose by nearly 8% to $67.4 billion. Compared with the first quarter of 2017, over 55% of all banks reported higher noninterest income.

Yet in a statement, FDIC Chairman Martin Gruenberg warned that positive economic conditions and a higher interest rate environment should not lead banks down a path of taking excessive risks. (It was likely Gruenberg’s last QBP presentation as Congress is set to confirm Jelena McWilliams as early as this week to succeed him.)

“The interest-rate environment and competitive lending conditions continue to pose challenges for many institutions. Some banks have responded by ‘reaching for yield’ through investing in higher-risk and longer-term assets,” Gruenberg said. “Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path. The industry also must be prepared to manage the inevitable economic downturn, whenever it comes, smoothly and without undue disruption to the financial system.”

Loan balances rose by nearly 5% over the previous 12 months, totaling $9.75 trillion. Compared with a year earlier, commercial and industrial loans rose by 4.7%, residential mortgages grew by 4.4% and credit card balances rose by 8.5%.

But banks’ expenses also grew. Noninterest expenses were 5.8% higher than a year earlier and 74% of banks reported an increase. Meanwhile, loan-loss provisions rose 3% from a year earlier to $12.4 billion, as nearly 37% of institutions reported higher provisions.

“The increase is due to higher net charge-offs, and a growing loan portfolio. Loan-loss provisions as a percent of net operating revenue totaled 6.2% for the first quarter, down from 6.6% a year ago,” the FDIC’s report said.

Three new banks were created during the first quarter, the agency said, but the total number of institutions declined by 63, from a year earlier, to 5,607. During the quarter, 65 institutions were absorbed by merger transactions. The number of banks on the agency's Problem List fell by three to 92. However, the assets of institutions on the list more than doubled, from $24 billion to $56, suggesting a larger institution may have been added to the list.

While the Deposit Insurance Fund increased by $2.3 billion during the quarter, to $95.1 billion, the ratio of DIF reserves to insured deposits were unchanged at 1.3% as a result of strong growth in estimated insured deposits. The agency is required to bring the reserve ratio up to 1.35% by Sept. 30, 2020, and large banks are currently subject to a premium surcharge in order to meet that minimum.

The report said just over 70% of community banks reported higher quarterly earnings. Community banks' profits totaled just over $6 billion, a 17.7% increase from a year earlier, with strong growth in net interest income and lower tax-related expenses. “Excluding the effect of a lower corporate tax rate, estimated quarterly net income [for community banks] would have been $5.6 billion—up 9.2 percent from the $5.1 billion reported in first quarter 2017,” the report said.