US bank profits soar as higher rates and less regulations boost outlook

PUBLISHED : Wednesday, 01 March, 2017, 1:00am
UPDATED : Wednesday, 01 March, 2017, 1:00am

US banks’ earnings in the final quarter of 2016 rose 7.7 per cent from a year earlier, as lending continued to grow and banks set aside less for losses on loans for the first time since late 2015.

The data issued Tuesday by the Federal Deposit Insurance Corp. (FDIC) showed strength in the industry more than eight years after the financial crisis struck. However, banks continued to post bigger losses on loans, especially for credit cards and commercial and industrial loans.

The FDIC reported that US banks earned US$43.7 billion in the fourth quarter, up from US$40.8 billion a year earlier. Almost 60 per cent of banks reported an increase in profit from a year earlier. Only 8.1 per cent of banks were unprofitable, down from 9.6 per cent in the fourth quarter of 2015.

FDIC Chairman Martin Gruenberg said some banks have been getting around low interest rates that crimp their profits by making more risky loans with higher rates and extending the terms of loans. FDIC examiners will continue to keep a close eye on the situation, he said.

As a sign of a healthy banking industry, overall lending increased by 0.8 per cent. Credit card loans showed the biggest growth, 5 per cent, while lending for real estate construction rose 3.3 per cent. Banks’ net interest income on loans increased by US$8.4 billion, or 7.6 per cent.

At the same time, the volume of credit card loans that were written off in the fourth quarter rose by US$1.4 billion, or 24.8 per cent. Commercial and industrial loans written off jumped by US$666 million, or 37.9 per cent.

After the election of President Donald Trump in November, long-term interest rates climbed, propelled largely by investors’ belief that his plan to cut taxes and spend massively on roads, bridges, airports and other infrastructure could ignite inflation. When they foresee rising inflation, bond investors demand higher long-term rates and pay lower prices for bonds.

Banks could earn more interest on loans. On Wall Street, the anticipation of higher rates has helped push up prices of bank stocks. Also stoking the rise have been expectations that regulations affecting the banking industry will be eased in the Trump administration.

Trump earlier this month launched his long-promised attack on banking restrictions that came into law after the financial crisis, ordering his Treasury secretary to review the 2010 Dodd-Frank oversight law.

Federal Reserve policymakers recently decided to leave the central bank’s key interest rate unchanged. But they discussed the need to raise the rate again “fairly soon,” especially if the economy remains strong.

Gruenberg has said that higher interest rates could be “a double-edged sword” for the banking industry. While bringing in more interest on loans, it also could increase the cost for banks to borrow to fund the loans they make.

US banks must pay US$2 bn/year to insure against a future market collapse

The number of banks on the FDIC’s confidential “problem list” fell to 123 in the latest period from 132 in the third quarter. The 123 banks requiring special monitoring by the agency’s examiners is down sharply from the peak of 888 problem banks in the first quarter of 2011.

The number of bank failures continues to slow. So far this year, two banks have failed. Five were shuttered in all of last year. Failures declined from 24 in 2013 to 18 in 2014 and only eight in 2015. They are down sharply from 157 in 2010 — the most in one year since the height of the savings and loan crisis in 1992. Normally in a strong economy, an average of four or five banks closes annually.

The decline in bank failures has allowed the deposit insurance fund to strengthen. The fund, which turned from deficit to positive in the second quarter of 2011, had an US$83.2 billion balance at the end of December, according to the FDIC. That was up from US$80.7 billion at the end of September.

The FDIC was created during the Great Depression to insure bank deposits. It monitors and examines the financial condition of US banks. The agency guarantees deposits up to $250,000 per account.

Gruenberg, who was appointed by President Barack Obama, is remaining as chairman of the independent agency in the Trump administration, to complete his term that expires in November.

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