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FDIC-Insured Banks' Q3 Earnings Impress on Robust Revenues

FDIC-insured commercial banks and savings institutions' stellar Q3 earnings driven by higher net operating revenues and lower provisions, partly muted by elevated non-interest expenses.

The Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported third-quarter 2018 earnings of $62 billion, up 29.3% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6.8 billion, up 21.6% on a year-over-year basis.

Banks’ earnings were supported by higher net operating revenues and a lower effective tax rate. Further, rise in loans and net interest margin were tailwinds. Moreover, decline in number of ‘problem banks’ and lower provisions were positives. Nonetheless, elevated non-interest expenses remained an undermining factor.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the recently-reported quarter. Though such banks constitute only 1.8% of the total number of domestic banks, these accounted for approximately 80% of the industry’s earnings. Leading names in this space include JPMorgan JPM, Bank of America BAC, Citigroup C and Comerica CMA.

All the above-mentioned banks carry a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Net Operating Revenues & Margin Improve, Costs Flare Up

Banks have been striving to gain profits and are boosting their productivity. More than 70% of all FDIC-insured institutions reported improvement in quarterly net income, while the remaining witnessed a decline from the prior-year quarter level. Additionally, the percentage of institutions reporting net losses in the quarter edged down to 3.5% from 4% witnessed in the year-ago quarter.

As of Sep 30, 2018, the measure for profitability or average return on assets (ROA) inched up to 1.41% from 1.37% recorded as of Sep 30, 2017.

Net operating revenues came in at $203.8 billion, up 6.3% year over year. A rise in net interest income, as well as non-interest income was the driving factor.

Net interest income was recorded at $137.1 billion, up 7.5% year over year, aided by marginal growth in interest-bearing assets and elevated net interest margins (NIM). Notably, rise in net interest income of around 83% of banks was witnessed.

NIM inched up to 3.45% from 3.30% recorded in the year-earlier quarter, stemming from faster growth in average asset yields than average funding costs. Notably, around 70% of banks reported growth in NIM.

Non-interest income for the banks improved 3.8% year over year to $66.7 billion. This upswing stemmed from higher servicing income, investment banking fees and other non-interest income.

Total non-interest expenses for the establishments were $113.6 billion in the quarter, up 4% on a year-over-year basis, due to rise in other non-interest expenses, and elevated salary and employee-benefit expenses.

Credit Quality: A Mixed Bag

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $11.2 billion, up 1.6% year over year. Notably, higher credit card charge-offs aided this upside.

In the Sep-end quarter, provisions for loan losses for the institutions were $11.9 billion, down 12.6% year over year. The level of non-current loans and leases declined 11.8% year over year to $101.3 billion. The non-current rate was 1.02%.

Strong Loan & Deposit Growth

The capital position of banks remained solid. Total deposits continued to rise and were recorded at $13.6 trillion, up 2.7% year over year. Additionally, total loans and leases were $9.9 trillion, up 4% year over year.

As of Sep 30, 2018, the Deposit Insurance Fund (DIF) balance increased to $100.2 billion from $90.5 billion as of Sep 30, 2017. Furthermore, higher assessment income and interest earned on investment securities primarily supported growth in fund balance.

No Bank Failures, Shrinking Problem Institutions, New Charter Added

During the Jul-Sep period, none of the banks failed, one new charter was added, while 60 were merged. As of Sep 30, 2018, the number of ‘problem’ banks declined from 82 to 71. This signifies the lowest number reported since third-quarter 2007. Total assets of the ‘problem’ institutions declined to $53.3 billion from $54.4 billion reported in the previous quarter.

Our Viewpoint

The drop in the number of problem institutions looks encouraging, with the third quarter witnessing top-line growth on higher NIM and lower taxes. Banks have been gradually easing their lending standards and trending toward higher fees to counter pressure on the top line. In addition, more interest-rate hikes and loan growth will help ease stress on interest income.

Also, continued expense control and stable balance sheets are likely to act as tailwinds in the upcoming quarters. Moreover, with improving economy, significant improvement in banks’ profitability is expected.

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