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FDIC-Insured Banks Q3 Earnings Dip, NIM Shrinks on Low Rates

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The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported third-quarter 2020 earnings of $51.2 billion, down 10.7% year over year. Nonetheless, this reflected marked improvement from first-half 2020 performance as coronavirus pandemic significantly hurt banks’ financials.

Notably, community banks, constituting 91% of all FDIC-insured institutions, reported net income of $7.3 billion, up 10% year on year.

Banks’ earnings were adversely impacted by low rates and muted loan demand. Also, rise in operating expenses and higher credit costs were major drags. However, improvement in non-interest income, slight rise in business activity and consumer spending, and higher deposit balance offered some support. In addition, problem banks near historic lows were a tailwind.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the September quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these accounted for more than 80% of the industry’s earnings. Some of the notable names in this space are JPMorgan (JPM - Free Report) , Bank of America (BAC - Free Report) , Citigroup (C - Free Report) , Wells Fargo (WFC - Free Report) and Truist Financial (TFC - Free Report) .

JPMorgan, BofA, Wells Fargo and Truist Financial carry a Zacks Rank #3 (Hold), while Citigroup has a Zacks Rank #4 (Sell), at present.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, 51.3% of all FDIC-insured institutions reported declines in the quarterly net income, while the remaining registered increases from the prior-year quarter level. Additionally, the percentage of institutions reporting net losses in the quarter went up to 4.7% from the prior year.

As of Sep 30, 2020, the measure for profitability or average return on assets declined to 0.97% from 1.25% recorded as of Sep 30, 2019.

Net Operating Revenues Fall, Costs Rise

Net operating revenues came in at $201.349 billion, down 3.3% year over year. A fall in net interest income was mostly offset by high non-interest income.

Net interest income (NII) was $128.7 billion, down 7.2% year over year. Remarkably, 49.9% of banks witnessed fall in NII. Also, this was the biggest decline in NII ever.

Net interest margin (NIM) contracted 68 basis points (bps) to 2.68%. Decline in asset yields more than funding costs on significant increase in low yielding assets resulted in the lowest ever NIM. Also, this marked the largest year-over-year bps fall reported ever.

Non-interest income for banks grew 4.5% year over year to $72.6 billion. This upside resulted from higher trading revenues and net gains on loan sales. On the other hand, service charge on deposit accounts and fees related to cards witnessed a decline.

Total non-interest expenses were $123.6 billion, increasing 3% year over year. The rise was mainly due to higher salary and employee-benefit expenses.

Credit Quality: Mixed Bag

Net charge-offs (NCOs) were $12.7 billion, down 3.2% year over year. The fall was primarily due to lower NCOs for credit cards, which was partially offset by higher commercial and industrial (C&I) loan NCOs.

Provisions for credit losses were $14.4 billion, which increased 3.5% from the prior-year period. Nearly 53% of banks recorded a rise in the same. Further, it was noted that the adopters of the current expected credit losses accounting methodology witnessed a fall in provisions, while non-adopters recorded 83.4% rise.

The level of non-current loans and leases climbed 7.9% sequentially to $127.5 billion. The non-current rate was 1.17%.

Loan Balance Down, Deposits Rise

As of Sep 30, 2020, total loans and leases were $10.9 trillion, falling nearly 1%. Lower C&I loan balance was the main reason for the decline.

Total deposits kept rising, amounting to $17.1 trillion, up almost 1% sequentially.

As of Sep 30, 2020, the Deposit Insurance Fund (DIF) balance increased to $116.4 billion from $108.9 billion as of Sep 30, 2019. Higher assessment income largely supported growth in DIF balance, while interest earned on investment securities declined.

No Bank Failures, New Charter Added

During the reported quarter, no bank failures were recorded, while one new bank was added. Further, 33 banks were absorbed following mergers.

As of Sep 30, 2020, the number of ‘problem’ banks increased to 56 from 52. This number remains near historic lows. Total assets of the ‘problem’ institutions increased to $53.9 billion from the $48.1 billion reported in the prior quarter.

Our Take

Though interest-rate cuts amid the coronavirus concerns continue to adversely impact banks’ margins, gradual economic revival and a modest boost in demand for loan are expected to support financials. Further, banks have been gradually easing their lending standards and diversifying revenues toward non-interest sources. Thus, these efforts are likely help counter pressure on the top line.

Also, ‘problem’ institutions near historic lows and no bank failures during the third quarter look encouraging.

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