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FDIC-Insured Banks' Q4 Earnings Up, NIM Shrinks on Low Rates

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The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported fourth-quarter 2020 earnings of $59.9 billion, up 9.17% year over year. The improvement was largely driven by lower credit costs.

FDIC Chairman Jelena McWilliams said, “Banks remained resilient in fourth quarter 2020, consistent with the improving economic outlook.”

Community banks, constituting 91% of all FDIC-insured institutions, reported net income of $7.4 billion, up 21.2% year on year.

Banks’ earnings were driven by a rise in non-interest income and drastic fall in provisions. Further, a slight increase in business activity and consumer spending, along with higher deposit balance offered some support. In addition, problem banks near historic lows were a tailwind. However, low rates, muted loan demand and a rise in operating expenses were major undermining factors.

Banks, with assets worth more than $10 billion, accounted for major part of earnings for the December 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) .

BofA carries a Zacks Rank #2 (Buy), while JPMorgan, Citigroup, Wells Fargo and Truist Financial hold a Zacks Rank #3 (Hold), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Further, 57.8% of all FDIC-insured institutions reported growth in quarterly net income, while the remaining registered fall from the prior-year level. Also, the percentage of institutions reporting net losses in the quarter went up to 7.3% from the prior year.

Average return on assets for fourth-quarter 2020 declined to 1.11% from 1.19% as of Dec 31, 2019.

Net Operating Revenues Fall, Costs Rise

Net operating revenues came in at $201.7 billion, down marginally year over year. The fall was mainly due to decline in net interest income, which was mostly offset by higher non-interest income.

Net interest income (NII) was $131.3 billion, down 3.9% year over year. This was the fifth consecutive quarterly decline in NII.

Net interest margin (NIM) contracted 60 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.

Non-interest income for banks grew 6.5% year over year to $70.3 billion. This upside mainly resulted from a rise in net gains on loan sales, partially offset by lower trading revenues.

Total non-interest expenses were $125 billion, increasing 2.7% from the prior-year quarter. The rise was mainly due to higher salary and employee-benefit expenses.

Credit Quality Improves

Net charge-offs (NCOs) were $11.2 billion, down 19.7% year over year. The fall was primarily due to lower NCOs for credit cards, partially offset by higher commercial and industrial (C&I) loan NCOs.

Provisions for credit losses were $3.5 billion, which plunged 76.5% from the prior-year period. This marked the lowest level since second-quarter 1995. Notably, nearly 33% of the banks recorded a fall in the same.

The level of non-current loans and leases climbed 34.7% from the year-ago quarter to $128.5 billion. The non-current rate was 1.18%.

Loan Balance Down, Deposits Rise

As of Dec 31, 2020, total loans and leases were $10.9 trillion, falling slightly from the prior quarter. Lower C&I loan balance (down 4.1%) was the main reason for the decline.

Total deposits kept rising throughout the quarter, amounting to $17.8 trillion, up 4.1% sequentially.

As of Dec 31, 2020, the Deposit Insurance Fund (DIF) balance increased modestly to $117.9 billion from the December 2019 level. Higher assessment income and interest earned on investment securities largely supported the growth in DIF balance.

Two Bank Failures, Three New Banks

During the reported quarter, two bank failures were recorded, while three new banks were added. Further, 31 banks were absorbed following mergers.

As of Dec 31, 2020, the number of ‘problem’ banks totaled 56, unchanged from the prior quarter. This number is close to historic lows. Total assets of the ‘problem’ institutions increased to $55.8 billion from $53.9 billion reported in the third quarter.

Our Viewpoint

Though interest-rate cuts amid coronavirus concerns continue to adversely impact banks’ margins, gradual economic revival and a modest boost in the demand for loans 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 to help counter the pressure on the top line.

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