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FDIC-Insured Banks' Q3 Earnings Down on Higher Provisions
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The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported third-quarter 2023 earnings of $68.4 billion, declining 4.6% year over year.
Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the September-ended quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these account for approximately 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) and Wells Fargo (WFC - Free Report) .
Banks’ earnings were adversely impacted by higher provisions on expectations of a worsening operating backdrop. Also, non-interest income declined during the quarter. A rise in non-interest expenses, higher funding costs and lower deposit balance were the other headwinds.
Nonetheless, a rise in net operating revenues driven by growth in net interest income (NII) acted as a major tailwind. Higher interest rates and decent loan demand offered some support.
Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $6.7 billion, down 15% year over year. This was mainly due to an increase in non-interest expenses and lower non-interest income.
The return on average assets in third-quarter 2023 fell to 1.17% from 1.21% as of Sep 30, 2022.
Net Operating Revenues & Expenses Rise
Net operating revenues came in at $249.3 billion, up 1.6% year over year.
NII was $175.2 billion, increasing 3.9% year over year. Net interest margin (NIM) jumped 30 basis points (bps) to 3.30%, which is above the pre-pandemic average of 3.25%. JPMorgan, Bank of America, Citigroup and Wells Fargo also witnessed an increase in NIM.
Non-interest income declined 3.5% to $74.1 billion.
Total non-interest expenses were $140.9 billion, increasing 1.5%. The rise was mainly due to higher compensation expenses.
Credit Quality Deteriorating
Net charge-offs (NCOs) for loans and leases were $15.7 billion, surging substantially year over year. NCO rate was 0.51% in the third quarter, up 25 bps from the prior-year quarter on the back of a higher credit card charge-off balance. The NCO rate is now above its pre-pandemic average of 0.48%.
Provisions for credit losses were $19.5 billion during the third quarter, jumping 33.2% from the year-ago quarter. Several lenders, including Bank of America, Citigroup and Wells Fargo, reported higher provisions.
Loans Rise, Deposits Fall
As of Sep 30, 2023, total loans and leases were $12.3 trillion, which grew marginally from the prior quarter. The rise was majorly driven by higher credit card loan balances and one-to-four family residential mortgages.
Total deposits amounted to $18.6 trillion, down marginally sequentially, mainly due to a fall in non-interest-bearing deposits. This marked the sixth consecutive quarterly decline.
Unrealized losses on securities were $683.9 billion, jumping 22.5% from the prior quarter. The surge was largely due to an increase in mortgage rates that lowered the value of mortgage-backed securities.
As of Sep 30, 2023, the Deposit Insurance Fund (DIF) balance increased 2% from the June 2023 level to $119.3 billion. A rise in the DIF was largely driven by an assessment income of $3.2 billion.
One Bank Failure, Two New Banks
During the reported quarter, one bank failed. Further, two new banks were added, while 28 banks were absorbed following mergers.
As of Sep 30, 2023, the number of ‘problem’ banks was 44. Total assets of the ‘problem’ institutions increased to $53.5 billion from $46 billion reported in the second quarter of 2023.
Conclusion
The FDIC chairman, Martin Gruenberg, said, “The banking industry still faces significant downside risks from the continued effects of inflation, rising market interest rates, and geopolitical uncertainty. In addition, deterioration in the industry’s commercial real estate portfolio is beginning to materialize in office properties. These issues, together with funding and earnings pressures, will remain matters of ongoing supervisory attention by the FDIC.”
Though higher interest rates, decent loan demand and a changing revenue mix will offer much-needed support to banks’ top line, rising deposit costs will weigh substantially on it. This will likely lead to a contraction in net interest margins going forward. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.
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FDIC-Insured Banks' Q3 Earnings Down on Higher Provisions
The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported third-quarter 2023 earnings of $68.4 billion, declining 4.6% year over year.
Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the September-ended quarter. Though such banks constitute only 3% of the total number of FDIC-insured institutes, these account for approximately 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) and Wells Fargo (WFC - Free Report) .
At present, JPMorgan sports a Zacks Rank #1 (Strong Buy), while Bank of America, Citigroup and Wells Fargo carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Banks’ earnings were adversely impacted by higher provisions on expectations of a worsening operating backdrop. Also, non-interest income declined during the quarter. A rise in non-interest expenses, higher funding costs and lower deposit balance were the other headwinds.
Nonetheless, a rise in net operating revenues driven by growth in net interest income (NII) acted as a major tailwind. Higher interest rates and decent loan demand offered some support.
Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $6.7 billion, down 15% year over year. This was mainly due to an increase in non-interest expenses and lower non-interest income.
The return on average assets in third-quarter 2023 fell to 1.17% from 1.21% as of Sep 30, 2022.
Net Operating Revenues & Expenses Rise
Net operating revenues came in at $249.3 billion, up 1.6% year over year.
NII was $175.2 billion, increasing 3.9% year over year. Net interest margin (NIM) jumped 30 basis points (bps) to 3.30%, which is above the pre-pandemic average of 3.25%. JPMorgan, Bank of America, Citigroup and Wells Fargo also witnessed an increase in NIM.
Non-interest income declined 3.5% to $74.1 billion.
Total non-interest expenses were $140.9 billion, increasing 1.5%. The rise was mainly due to higher compensation expenses.
Credit Quality Deteriorating
Net charge-offs (NCOs) for loans and leases were $15.7 billion, surging substantially year over year. NCO rate was 0.51% in the third quarter, up 25 bps from the prior-year quarter on the back of a higher credit card charge-off balance. The NCO rate is now above its pre-pandemic average of 0.48%.
Provisions for credit losses were $19.5 billion during the third quarter, jumping 33.2% from the year-ago quarter. Several lenders, including Bank of America, Citigroup and Wells Fargo, reported higher provisions.
Loans Rise, Deposits Fall
As of Sep 30, 2023, total loans and leases were $12.3 trillion, which grew marginally from the prior quarter. The rise was majorly driven by higher credit card loan balances and one-to-four family residential mortgages.
Total deposits amounted to $18.6 trillion, down marginally sequentially, mainly due to a fall in non-interest-bearing deposits. This marked the sixth consecutive quarterly decline.
Unrealized losses on securities were $683.9 billion, jumping 22.5% from the prior quarter. The surge was largely due to an increase in mortgage rates that lowered the value of mortgage-backed securities.
As of Sep 30, 2023, the Deposit Insurance Fund (DIF) balance increased 2% from the June 2023 level to $119.3 billion. A rise in the DIF was largely driven by an assessment income of $3.2 billion.
One Bank Failure, Two New Banks
During the reported quarter, one bank failed. Further, two new banks were added, while 28 banks were absorbed following mergers.
As of Sep 30, 2023, the number of ‘problem’ banks was 44. Total assets of the ‘problem’ institutions increased to $53.5 billion from $46 billion reported in the second quarter of 2023.
Conclusion
The FDIC chairman, Martin Gruenberg, said, “The banking industry still faces significant downside risks from the continued effects of inflation, rising market interest rates, and geopolitical uncertainty. In addition, deterioration in the industry’s commercial real estate portfolio is beginning to materialize in office properties. These issues, together with funding and earnings pressures, will remain matters of ongoing supervisory attention by the FDIC.”
Though higher interest rates, decent loan demand and a changing revenue mix will offer much-needed support to banks’ top line, rising deposit costs will weigh substantially on it. This will likely lead to a contraction in net interest margins going forward. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.