WASHINGTON — The Federal Deposit Insurance Corp. said banks' net income fell nearly 6% in 2022 compared with a year earlier, and it warned of turbulence ahead.
Chairman Martin Gruenberg said Tuesday the FDIC will continue to monitor a variety of risks facing the industry, including persistent inflation, the war in Ukraine and rising interest rates.
"The banking industry continues to face significant downside risks from the effects of inflation, rising market interest rates and continued geopolitical uncertainty," Gruenberg said at a news conference to discuss the agency's latest Quarterly Banking Profile.
"Credit quality and profitability may weaken due to these risks and may result in tighter loan underwriting, slower loan growth, higher provision expenses and liquidity constraints" he said.
Bank net income totaled $263 billion in 2022, down $16.1 billion or 5.8% from the previous year. The FDIC says these reductions reflect higher provisions for loan losses — up $82.6 billion — and noninterest expenses— up $27.4 billion — from 2021. Those two costs more than offset the $105.5 billion increase in net interest income.
The aggregate return on average assets ratio also dropped 11 basis points to 1.12% in 2022.
Short-term interest rate growth coupled with longer asset maturities could hurt banks' results in the near future, according to Gruenberg. Though unrealized losses on held-to-maturity and available-for-sale securities fell 10% to $620 billion in the last three months of the year, Gruenberg said that figure is still high.
"The combination of a high level of longer-term asset maturities and a moderate decline in total deposits underscores the risk that these unrealized losses could become actual losses, should banks need to sell securities to meet liquidity needs," Gruenberg said.
To be sure, banks enjoyed healthy spreads. The industry's fourth-quarter net interest margin rose 23 basis points from the previous quarter and 82 basis points from the year prior to reach 3.37%, well above the pre-pandemic average of 3.25%, and the largest reported net interest margin year-over-year increase in the history of the QBP.
Gruenberg indicated banks of all sizes benefited from interest rate hikes last year, charging high interest on loans and paying low rates back to depositors. Banks have been slow to pass these record margins onto consumers in the form of higher interest on their deposited funds, he said.
"The change in deposit rates paid by banks continues to lag the change in rates charged on loans," Gruenberg said.
Fourth-quarter net income grew 7.1% from the year-earlier quarter to $68.4 billion as growth in net interest income exceeded elevated provision expenses.
Despite an increase in insured deposits, total deposits dropped by $143.3 billion in the fourth quarter to $19.2 trillion, a decrease of 0.7% from the previous quarter. It was the third consecutive quarter in which total deposits declined.
"While this reduction slightly offsets the unprecedented growth in deposits reported during the pandemic, total deposits are still well above pre-pandemic average levels. A reduction in uninsured deposits was the driver of the quarterly decline," Gruenberg said.
The prevalence of problem banks also reached its lowest level since QBP data collection began in 1984. The QBP identified a total of 39 problem banks, a decrease of 3 from the previous quarter. Total assets held by problem banks declined by $116.3 billion to $47.5 billion in the fourth quarter.
No banks failed in the fourth quarter, marking 28 months without such an event, three months short of the all-time record. Three new banks opened, and 36 merged.
