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FDIC-Insured Banks' Q3 Earnings Impressive, Revenues Rise

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Federal Deposit Insurance Corporation (FDIC)-insured commercial banks and savings institutions reported third-quarter 2017 earnings of $47.9 billion, up 5.2% year over year. Notably, community banks, constituting 92% of all FDIC-insured institutions, reported net income of $6 billion, up 9.4% on a year-over-year basis.

Banks’ earnings were driven by higher revenues and loan growth. However, higher expenses and loan loss provisions were major negatives.

Banks, with assets worth more than $10 billion, accounted for a major part of earnings in the reported quarter. Though such banks constitute only 1.8% of the total number of domestic banks, these accounted for approximately 80% of the industry’s earnings. Leading names in this space include JPMorgan Chase & Co. (JPM - Free Report) , Bank of America Corporation (BAC - Free Report) , Citigroup Inc. (C - Free Report) and U.S. Bancorp (USB - Free Report) .

All the above-mentioned banks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Net Interest Income & Margin Rise, Non-Interest Income Falls, Costs Flare Up

Banks have been striving to gain profits and are boosting productivity. Around 67.3% of all FDIC-insured institutions reported an improvement in quarterly net income, while the remaining saw a decline from the prior-year quarter level. Additionally, the percentage of institutions reporting net losses in the quarter declined to 3.9% from 4.6% in the year-ago quarter.

The measure for profitability or average return on assets (ROA) inched up to 1.12% from 1.10% recorded in the year-earlier quarter.

Net operating revenues were $191.7 billion, up 4.4% year over year. A rise in net interest income, partially offset by non-interest income, was a driving factor.

Net interest income was recorded at $127.5 billion, up 7.4% year over year, driven by rise in net interest income of 83.5% of banks. Net interest margin (NIM) increased to 3.30% from 3.18% recorded in the year-earlier quarter owing to a rise in interest-bearing assets. This depicts the highest average margin for the industry since fourth-quarter 2012.

Non-interest income for the banks declined 1% year over year to $64.2 billion. Decline in gains on loan sales, servicing fee income and trading income led to the decline.

Total non-interest expenses for the establishments were $109 billion in the quarter, up 1.9% on a year-over-year basis.

Credit Quality: A Concern?

Overall, credit quality was a mixed bag in the reported quarter. Net charge-offs increased to $11 billion, up 8% year over year, reflecting the eighth quarterly rise. Notably, higher credit card and auto loans charge-offs drove the upside.

In the reported quarter, provisions for loan losses for the institutions were $13.8 billion, up 20.9% year over year. The level of non-current loans and leases declined 14.6% year over year to $114.4 billion, indicating the 29th decline in non-current loan balances in the last 30 quarters. The non-current rate was 1.20%, reflecting the lowest rate since third-quarter 2007.

Strong Loan & Deposit Growth

The capital position of the banks was solid. Total deposits continued to rise and were recorded at $13.2 trillion, up 3.3% year over year. Further, total loans and leases were $9.6 trillion, up 3.5% year over year.

As of Sep 30, 2017, the Deposit Insurance Fund (DIF) balance increased to $90.5 billion from $80.7 billion as of Sep 30, 2016. Furthermore, interest earned on investment securities primarily led to the growth in fund balance.

No Bank Failures, Shrinking Problem Institutions, New Charters Added

During third-quarter 2017, no bank failed, two new charters were added, while 50 were merged. As of Sep 30, 2017, the number of ‘problem’ banks declined from 105 to 104. This signifies the lowest number in more than seven years, down from 888 recorded in first-quarter 2011. Total assets of the ‘problem’ institutions declined to $16 billion from $17.2 billion.

Our Viewpoint

The decline in the number of problem institutions looks encouraging with the quarter witnessing top-line growth on higher NIM. Banks have been gradually easing lending standards and trending toward higher fees to counter pressure on the top line. In addition, more interest rate hikes will help ease the pressure on interest income. In addition, consistent expense control and stable balance sheets are likely to act as tailwinds in the upcoming quarters.

With lingering uncertainty in the economy, we do not see this issue-ridden sector returning to its pre-recession levels anytime soon. What encourages us is that a lot depends on to what extent President Trump lives up to his promises. Bank stocks are likely to face the brunt if the promised policy goals are not achieved.

The Fed’s actions on expediting rate hike — which is again a function of economic growth based on Trump’s policy alterations — will also play a key role in keeping the optimism on bank stocks alive.

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