WASHINGTON — While there were positive signals like loan growth and improved interest margins in the Federal Deposit Insurance Corp.'s first-quarter report card, there were also signs of trouble for the future, including larger institutions' ongoing exposure to the energy sector.
Problems in the oil and gas market helped drive earning down by 2% to $39.1 billion for the industry overall, even though more than 60% of financial institutions reported higher earnings. Only 5% of banks were unprofitable in the quarter, the lowest mark since 1998.
Still, a jump in the number of noncurrent loans, particularly for commercial and industrial credits, was a sign of alarm. Overall, loans at least 90 days past due grew by 2.4%, or $3.3 billion, driven by a $9.3 billion increase in noncurrent C&I loans, which the FDIC attributed partly to the energy industry.
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On the one hand, the FDIC's Quarterly Banking Profile showed how normal banking is again. But there were also worrying signs, including an increase in chargeoffs, higher loan-loss provisions and fears of the impact from the energy sector.
February 23 -
U.S. bank earnings increased 5% in the third quarter from a year earlier to $40.4 billion as a few large banks recorded lower litigation expenses, the Federal Deposit Insurance Corp. said Tuesday.
November 24 -
U.S. banking earnings in the second quarter rose 7.3% from a year earlier to $43 billion as institutions enjoyed higher revenues and lower noninterest expenses, the Federal Deposit Insurance Corp. said Wednesday.
September 2
"The direct impact is on the larger institutions, particularly a group of regional banks" in oil-rich regions, said FDIC Chairman Martin Gruenberg during a briefing Wednesday. "For most community banks the exposures are indirect," he added, tied to the "secondary impact [of low oil prices] on local economies."
The FDIC cited sharply lower energy prices for reducing the ability of "many borrowers to service their debts." The average noncurrent loan rate on C&I loans rose significantly to 1.24% from 0.78% during the quarter, the highest noncurrent rate for such loans since yearend 2011. (Noncurrent rates declined for all other major loan categories during the quarter.)
Energy woes also spurred banks to increase their loan-loss provisions, which jumped nearly 50% to $12.5 billion, compared with last year. It was the seventh straight quarter in which banks increased loan-loss reserves and the largest quarterly increase in more than three years. More than a third of banks reported higher loan-loss provisions than in the year-earlier quarter, with most of the increase happening at bigger banks. Provisions for banks with $10 billion or more of assets rose 55%, while smaller banks' provision rose by only 16%.
Industry representatives said the boost in provisions made sense.
This "is prudent management to ensure resources are available in a downturn," said James Chessen, the chief economist at the American Bankers Association. "Banks' exposure to the oil and gas industry is small and won't restrain them from continuing to meet the credit needs of businesses and individuals."
But net chargeoffs were also on the rise, increasing by 12% to $10.1 billion from a year earlier. It was the second consecutive quarter with a year-over-year increase, following 21 quarters in a row in which net chargeoffs dropped. As with noncurrent loans, C&I loans made up the bulk of the increase in chargeoffs, which rose by 145% for such loans. Smaller net chargeoff increases were reported in credit cards, auto loans, real estate construction and development loans.
One bright spot was loan growth, which continued to increase at a healthy clip.
"Lending continues to be the bread and butter of America's hometown banks, and remains strong even as our GDP suggests a more modest expansion of the economy," Chessen said. "Business and commercial real estate loans grew strongly, and will serve as an important driver of growth in the second half of the year."
Loans to small businesses grew nearly 6% from last year, an indication that low interest rates had spurred borrowing, he added.
Total loans and leases rose by $99.7 billion — or 1.1% — in the first quarter, an increase largely driven by commercial and industrial loans. The growth of C&I loans of $71.2 billion — or 3.9% — included the introduction of new assets to the industry due to the acquisition of GE Capital's commercial lending and leasing business by Wells Fargo. With the purchase, Wells Fargo absorbed $26.7 billion in C&I loans, according to its first-quarter earnings report. That accounted for about 38% of the $71.2 billion industry increase.
Total assets in the first quarter grew 2%, to $16.3 trillion, compared with the fourth quarter of 2015 — marking the largest quarterly increase since 2008. Much of that growth was driven by a $239.5 billion — or 2% — increase in deposits in the first quarter, the FDIC said.
Net operating revenue rose by 2.7% to $172.9 billion compared with last year, driven in large part by a $6.7 billion growth in net interest income. Trading income fell sharply, by $1.9 billion — 24.9% — and noninterest income fell $2.2 billion, or 3.4%.
The picture looked a little different for community banks, a sector that seemed untouched for now by low energy prices. Overall net income for community banks grew 7.4% year over year.
Banks also saw an improved net interest margin, which jumped to 3.10% in the first quarter. But such margins can be a "double-edged sword," particularly for community banks, Gruenberg said.
"Particularly for institutions that have gone out further on the yield curve to generate revenue, it could expose them to interest rate risk as interest rates rise," he said.
Community banks could also get hit with the aftereffects of low oil prices further down the line, because of their indirect exposure, Gruenberg noted. For smaller institutions, "there's a little bit more of a lag."
The Deposit Insurance Fund's ratio of reserves to insured deposits rose 2 basis points in the first quarter, reaching 1.13%. A quarter after the ratio reaches 1.15%, most banks will receive a cut in their assessment rates, with some larger banks paying more due to a new surcharge that goes into effect at that time.
The number of financial institutions on the FDIC's "Problem List" in the first quarter fell from 183 to 165.
