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FDIC-Insured Banks: Q1 Earnings Weak, Revenues Improve

Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported first-quarter 2016 earnings of $39.1 billion, down 1.9% year over year. Notably, community banks, constituting 93% of all FDIC-insured institutions, reported net income of $5.2 billion, up 7.4% year over year.

Banks’ earnings were impacted by weakness in the energy sector which led to a significant rise in provision for loan losses. Moreover, weak trading activities were an undermining factor. However, organic growth aided by higher revenues, improved loan and deposit balances were a few bullish factors.

Banks with assets worth more than $10 billion contributed a major part of the earnings in the said quarter. Though such banks make up for only 1.6% of the total number of U.S. banks, they accounted for approximately 80% of the industry earnings. Leading names in the space include Wells Fargo & Co. WFC, Bank of America Corp. BAC, Citigroup Inc. C and U.S. Bancorp USB.

Performance in Detail

Banks are persistently striving to reap profits and are consequently boosting productivity. Around 61.4% of all institutions insured by the FDIC reported improvement in their quarterly net income, while the remaining recorded a decline in comparison to the prior-year quarter.

Moreover, the percentage of institutions reporting net losses for the quarter dropped to 5% from 5.7% in the last-year quarter. Notably, the percentage was the lowest recorded in any first quarter since 1998.

The measure for profitability or average return on assets (ROA) decreased to 0.97% from 1.02% in the prior-year quarter.

Net operating revenue was $173 billion, up 2.7% on a year-over-year basis. Rise in net interest income driven by loan growth at most banks was the driving factor.

Net interest income was recorded at $112.4 billion, up 6.4% year over year. The average net interest margin (NIM) increased to 3.10% from 3.02% in the prior-year quarter.

Non-interest income declined 3.4% year over year to $60.5 billion for the banks. Notably, lower servicing income and decline in trading income attributed to the fall.

Total non-interest expenses for the establishments were $104.8 billion in the quarter, up 1.2% on a year-over-year basis.

Credit Quality

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $10.1 billion, up 12.3% year over year, reflecting the second yearly rise in the past 21 quarters. Notably, all major loan groups recorded a year-over-year rise in charge-offs.

In the quarter under review, provisions for loan losses for the institutions came in at $12.5 billion, up 49.7% year over year. The level of non-current loans and leases increased 2.4% year over year to $15.8 billion, reflecting the first quarterly rise in non-current loan balances in the last 24 quarters. The noncurrent rate stood at 0.96%.

Balance Sheet

The capital position of the banks was strong. Total deposits continued to rise and were recorded at $12.4 trillion, up 3.9% year over year. Further, total loans and leases came in at $8.9 trillion, up 6.9% year over year.

As of Mar 31, 2016, the Deposit Insurance Fund (DIF) balance increased to $75.1 billion from $65.3 billion as of Mar 31, 2015. Moreover, interest earned on investment securities and assessment income primarily led to the growth in fund balance.

Bank Failures and Problem Institutions

During the first quarter of 2016, one insured institution failed. As of Mar 31, 2016, the number of "problem" banks declined from 183 to 165, reflecting the lowest number in approximately more than 7 years and significantly decreased from 888 recorded in first-quarter 2011. Total assets of the "problem" institutions also fell to $30.9 billion from $46.8 billion.

Our Viewpoint

Though a decline in the number of problem institutions is encouraging, the quarter remained challenging. Moreover, uncertainty regarding top-line growth persists as lower trading activity prevails. Moreover, credit risk is on the rise related to energy and agriculture loans.

However, banks have been gradually easing their lending standards and trending toward higher fees to counter the pressure on the top line. Then again, continued expense control and stable balance sheets should act as tailwinds in the upcoming quarters.

With lingering uncertainty in the economy, we do not see this issue-ridden sector returning to its pre-recession levels anytime soon. What encourages us though is that the U.S. banks are getting accustomed to increased legal and regulatory pressure and hence resorting to safer alternatives for higher earnings. This indicates their ability to better encounter challenges and grow at a moderate pace.

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US BANCORP (USB): Free Stock Analysis Report
 
WELLS FARGO-NEW (WFC): Free Stock Analysis Report
 
CITIGROUP INC (C): Free Stock Analysis Report
 
BANK OF AMER CP (BAC): Free Stock Analysis Report
 
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