In the midst of a potential economic crisis U.S. banks earned over $37 billion in the third quarter, but don't let those profits fool you.
"This was another quarter of gradual but steady recovery for FDIC-insured institutions," said FDIC Chairman Martin J. Gruenberg in a statement. "Signs of further progress were evident in a number of indicators, such as loan growth, asset quality and profitability."
But there's more to the story in the banking industry and just profits. It's revenue that the industry needs to be paying attention to and what many are concerned about when examining banks.
The FDIC report shows a small but welcome increase in net operating revenue of 3%, or $4.9 billion dollars. The biggest contributor, the FDIC says, was noninterest income. That includes gains on asset sales which were $5 billion above the level of a year ago. Almost half of all institutions (47.8%) reported year-over-year improvement in income from asset sales, and gains on sales of loans were $3.9 billion (227.5%) above the level of a year earlier.
That's not a very healthy nor sustainable earnings path.
Sure there are some bright spots for lenders right now. Mortgage banking is incredibly strong as evidenced in the third quarter by some of the biggest lenders. JPMorgan Chase saw mortgage revenue soar 72%. Wells Fargo saw mortgage banking revenue jump to $2.8 billion, up more than 50% from a year ago quarter. Expect more of that mortgage banking strength in the fourth quarter even from the likes of Bank of America which has scaled back its mortgage activity.
Loan growth is up slightly as well but it's an area that's still somewhat volatile. The third quarter saw an increase of $64.8 billion, or 1%, but that was below the second quarter's increase of $102 billion.
The factor that's become increasingly problematic for bank revenue is essentially low interest rates amid a sluggish economy. Historically low interest rates have banks feeling pressure on their net interest income which is a major contributor to banks’ earnings.
For now it seems there are a few sweet spots helping banks like mortgage banking mentioned above. Better credit quality is also allowing banks lower their loan loss provisions. Provisions declined year over year for a 12th consecutive quarter, falling by $3.8 billion, or 20.6%. These loan loss releases are also helping to boost profits temporarily. When banks are feeling better about their borrowers ability to repay loans they release the provisions which then ups earnings.
But the bulk of bank earnings rely on net interest income--Wells and Citigroup derive more than 50% of their net revenue from from net interest income, according to the quarterly update from Moody’s.
That same report warns that profitability at the nation’s banks will decline for the next 12 to 18 months as rates remain very low.
Just how much of an impact are interest rates having on banks? Speaking today at Goldman Sachs banking conference JPM's CFO Douglas Braunstein said if interest rates rise just 1% then JPMorgan could earn another $2.2 billion in profit.
