Banks’ economic outlook improving, but lending remains sluggish

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WASHINGTON — The latest earnings snapshot for the banking industry suggests that while institutions are upbeat about the economy, they remain cautious about lending.

A significant reduction in loan-loss expenses boosted net income last quarter as dire economic predictions about the pandemic did not come to pass, the Federal Deposit Insurance Corp. said in the Quarterly Banking Profile.

Loan-loss provisions in the fourth quarter dropped sharply by over 76% from a year earlier to $3.5 billion, which was the lowest total since the second quarter of 1995, the FDIC report said Tuesday. The decline signaled a reversal in banks’ economic outlook from earlier in the year, when many feared a direct hit to credit quality resulting from COVID-19. Loan-loss provisions had exceeded $60 billion in the second quarter.

Yet while many banks have a better outlook about 2021, the agency said the vast majority of banks nonetheless reported higher provisions.

“The decline in provisions for credit losses was not broad-based, as less than one-third … of all banks reported year-over-year declines,” the agency said in the QBP.

Meanwhile, lending continued to cool down in the final months of 2020. Though the 0.4% decline in total loans last quarter was driven in part by a 17% drop in Paycheck Protection Program loans, the annual loan growth rate of 3.3% was the lowest since the fourth quarter of 2013.

Still, quarterly net income grew 9% from a year earlier to $59.9 billion, helped by a 6.5% increase in noninterest income from a year earlier.

“Fourth-quarter net income rose, primarily due to lower provision expenses for credit losses and higher noninterest income,” FDIC Chair Jelena McWilliams said in remarks accompanying the report, though she added that “banks reported modest declines in asset quality and loan volume.”

The agency said banks using the current expected credit losses accounting standard, or CECL, reported an 88.9% drop in loan-loss provisions in the fourth quarter, or a decline of $11.2 billion. Those institutions account for most of the industry’s assets.

“They hold the vast amount of assets in the industry — like 82% of the assets, so they’re driving the results,” said Diane Ellis, director of insurance and research at the FDIC. “They’re looking out over a longer time horizon, and changes in macroeconomic outlook definitely contribute to that activity.”

In spite of the industry’s profit gains, the FDIC reported the second consecutive quarterly decline in loan balances, which totaled over $10.8 trillion. The drop was driven by a decline in commercial and industrial lending, which fell by 4.1%, or $103.8 billion, compared with the previous quarter. In contrast, total loans had risen sharply in the first quarter, growing by over 4%.

Annual loan growth was driven by a roughly 11% increase in commercial and industrial lending, though the agency stressed that that growth was concentrated “primarily in the first half of 2020.”

The industry’s full-year net income totaled $147.9 billion dollars in 2020, a drop of more than 36% from the previous year. According to the FDIC, that decline was “primarily attributable to higher provision expenses in the first half of 2020 tied to pandemic-related deterioration in economic activity.”

The industry’s performance by the end of 2020, however, suggests that some bankers are expecting sunnier days ahead.

“While banking industry income for the full-year 2020 declined from full year 2019 levels, banks remained resilient in the fourth quarter of 2020, consistent with the improving economic outlook,” McWilliams said.

Meanwhile, higher-than-normal deposit growth continues to weigh on bank balance sheets. The FDIC reported that deposit levels grew 4.1% between the third and fourth quarters of 2020. “While the quarterly growth in deposits is below the levels reported in the first half of 2020, it is the third largest quarterly dollar increase ever reported in the QBP,” the report said.

As a result, FDIC staff said, the reserve ratio of the Deposit Insurance Fund dropped one more basis point, from 1.30% to 1.29%, and still remains below the statutory minimum of 1.35%. “The reduction in the reserve ratio was solely a result of the strong growth and insured deposits,” said Ellis.

The industry also continues to suffer from historically slim net interest margins, which reached a record low in the third quarter of 2020 and failed to budge upwards by yearend. The industry’s average net interest margin of 2.68% was unchanged from the previous quarter but represented a drop of 60 basis points from the previous year.

The FDIC said that quarterly growth in noninterest income was propelled largely by loan sales, which swelled by more $3.9 billion compared to the same period in 2019, a percent increase of more than 100%.

Last year may also be remembered as the last time the nation’s banks numbered greater than 5,000. The total of insured depository institutions dropped from 5,033 in the third quarter to 5,001 in the fourth, with three new banks added, 31 absorbed by mergers, and two failures. For the year as a whole, the FDIC added six new banks, compared with 168 lost through mergers and four total bank failures.



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