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FDIC-Insured Banks' Q4 Earnings Down on Non-Recurring Charge
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The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported fourth-quarter 2023 earnings of $38.4 billion, plunging 43.7% 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 non-interest expenses, which recorded a drastic rise owing to “specific, non-recurring, non-interest expenses.” Further, an increase in provisions on expectations of a worsening operating backdrop and lower net interest income (NII) due to a rise in funding costs were the major undermining factors.
Nonetheless, a rise in non-interest income, growth in loans and deposit balance and higher interest rates acted as key tailwinds.
Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $5.9 billion, down 27.2% year over year. This was mainly due to an increase in provisions and lower NII.
The return on average assets in fourth-quarter 2023 fell to 0.65% from 1.16% as of Dec 31, 2022.
Net Operating Revenues Down, Expenses Rise
Net operating revenues came in at $242.2 billion, down marginally year over year.
NII was $175.2 billion, decreasing 3.2% year over year. Net interest margin (NIM) was 3.28%, down 9 basis points (bps) but still above the pre-pandemic average of 3.25%.
Non-interest income grew 9.4% to $67.6 billion.
Total non-interest expenses were $167.6 billion, jumping 23.3%. The rise was mainly due to large non-recurring expenses. Further, owing to “the nature of the non-recurring items, the increase in expense was more substantial in larger banks,” including JPM, BAC, C and WFC.
Credit Quality Deteriorating
Net charge-offs (NCOs) for loans and leases were $20.1 billion, surging 84.9% year over year. The NCO rate was 0.65% in the fourth quarter, up 29 bps from the prior-year quarter on the back of a higher credit card charge-off balance. The NCO rate was also above its pre-pandemic average of 0.48%.
Provisions for credit losses were $24.7 billion during the fourth quarter, jumping 18.6% from the year-ago quarter. This was due to larger credit card balances and charge-offs, greater risk in office properties and rising delinquency levels across loan portfolios. Several lenders, including Bank of America, JPMorgan, Citigroup and Wells Fargo, reported higher provisions.
Loans & Deposits Rise
As of Dec 31, 2023, total loans and leases were $12.5 trillion, which grew almost 1% from the prior quarter. The rise was majorly driven by higher credit card loan balances. Notably, about 75.5% of banks witnessed a rise in loan balance during the quarter.
Total deposits amounted to $18.8 trillion, up 1.4% sequentially, mainly due to an increase in time deposits. This marked the first quarterly growth in deposit balance since the first quarter of 2022.
Unrealized losses on securities were $477.6 billion, declining 23% from the prior quarter. The reported number was the lowest since the second quarter of 2022 but elevated compared with historical levels.
As of Dec 31, 2023, the Deposit Insurance Fund (DIF) balance increased 2% from the September 2023 level to $121.8 billion. A rise in the DIF was largely driven by an assessment income of $3.1 billion.
One Bank Failure, One New Bank
During the reported quarter, one bank failed. Further, one new bank was added, while 23 banks were absorbed following mergers.
As of Dec 31, 2023, the number of ‘problem’ banks was 52, an increase of eight. Total assets of the ‘problem’ institutions increased to $66.3 billion from $53.5 billion reported in the third quarter of 2023.
Conclusion
The FDIC chairman, Martin Gruenberg, said, “Ongoing economic and geopolitical uncertainty, continuing inflationary pressures, volatility in market interest rates, and emerging risks in some bank commercial real estate portfolios pose significant downside risks to the banking industry. 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 continue to weigh substantially on it. This will likely lead to a contraction in net interest margins. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.
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FDIC-Insured Banks' Q4 Earnings Down on Non-Recurring Charge
The Federal Deposit Insurance Corporation (“FDIC”)-insured commercial banks and savings institutions reported fourth-quarter 2023 earnings of $38.4 billion, plunging 43.7% 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, 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 (Strong Buy) stocks here.
Banks’ earnings were adversely impacted by higher non-interest expenses, which recorded a drastic rise owing to “specific, non-recurring, non-interest expenses.” Further, an increase in provisions on expectations of a worsening operating backdrop and lower net interest income (NII) due to a rise in funding costs were the major undermining factors.
Nonetheless, a rise in non-interest income, growth in loans and deposit balance and higher interest rates acted as key tailwinds.
Community banks, constituting 91% of all FDIC-insured institutions, reported a net income of $5.9 billion, down 27.2% year over year. This was mainly due to an increase in provisions and lower NII.
The return on average assets in fourth-quarter 2023 fell to 0.65% from 1.16% as of Dec 31, 2022.
Net Operating Revenues Down, Expenses Rise
Net operating revenues came in at $242.2 billion, down marginally year over year.
NII was $175.2 billion, decreasing 3.2% year over year. Net interest margin (NIM) was 3.28%, down 9 basis points (bps) but still above the pre-pandemic average of 3.25%.
Non-interest income grew 9.4% to $67.6 billion.
Total non-interest expenses were $167.6 billion, jumping 23.3%. The rise was mainly due to large non-recurring expenses. Further, owing to “the nature of the non-recurring items, the increase in expense was more substantial in larger banks,” including JPM, BAC, C and WFC.
Credit Quality Deteriorating
Net charge-offs (NCOs) for loans and leases were $20.1 billion, surging 84.9% year over year. The NCO rate was 0.65% in the fourth quarter, up 29 bps from the prior-year quarter on the back of a higher credit card charge-off balance. The NCO rate was also above its pre-pandemic average of 0.48%.
Provisions for credit losses were $24.7 billion during the fourth quarter, jumping 18.6% from the year-ago quarter. This was due to larger credit card balances and charge-offs, greater risk in office properties and rising delinquency levels across loan portfolios. Several lenders, including Bank of America, JPMorgan, Citigroup and Wells Fargo, reported higher provisions.
Loans & Deposits Rise
As of Dec 31, 2023, total loans and leases were $12.5 trillion, which grew almost 1% from the prior quarter. The rise was majorly driven by higher credit card loan balances. Notably, about 75.5% of banks witnessed a rise in loan balance during the quarter.
Total deposits amounted to $18.8 trillion, up 1.4% sequentially, mainly due to an increase in time deposits. This marked the first quarterly growth in deposit balance since the first quarter of 2022.
Unrealized losses on securities were $477.6 billion, declining 23% from the prior quarter. The reported number was the lowest since the second quarter of 2022 but elevated compared with historical levels.
As of Dec 31, 2023, the Deposit Insurance Fund (DIF) balance increased 2% from the September 2023 level to $121.8 billion. A rise in the DIF was largely driven by an assessment income of $3.1 billion.
One Bank Failure, One New Bank
During the reported quarter, one bank failed. Further, one new bank was added, while 23 banks were absorbed following mergers.
As of Dec 31, 2023, the number of ‘problem’ banks was 52, an increase of eight. Total assets of the ‘problem’ institutions increased to $66.3 billion from $53.5 billion reported in the third quarter of 2023.
Conclusion
The FDIC chairman, Martin Gruenberg, said, “Ongoing economic and geopolitical uncertainty, continuing inflationary pressures, volatility in market interest rates, and emerging risks in some bank commercial real estate portfolios pose significant downside risks to the banking industry. 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 continue to weigh substantially on it. This will likely lead to a contraction in net interest margins. Also, a deteriorating macroeconomic environment is expected to hurt banks’ financials.