Overall, the banking industry is gradually improving as evident from the second quarter. Though the number of troubled assets and institutions remain high, yet they are striving to show improvements. Moreover, loan balances increased in the quarter and loss provisions declined
Results for the quarter were impacted by significant trading loss reported by JPMorgan Chase & Co. ( JPM ) in July. On the other hand, major banks like Wells Fargo & Company ( WFC ) and Bank of America Corporation ( BAC ) contributed to the overall earnings growth.
Performance in Detail
Institutions are striving hard to be profitable and are bolstering their productivity.
Around two-thirds of all institutions insured by the FDIC, which approximates 62.7%, reported enhanced quarterly net income compared to the prior year. Moreover, shares of institutions reporting net losses for the quarter slumped to 10.9% from 15.7% in the last year.
The profitability measure - average return on assets (ROA) surged to 0.99% from 0.85% in the prior-year quarter.
Net operating revenue stood at $165.4 billion, up 0.8% year over year. The increase was due to rise in gains from loan sales by $3.0 billion. Additionally, realized gains on investment securities and other assets also augmented by $1.7 billion compared with the prior year.
Net interest income was recorded at $105.6 billion, almost in line with the prior-year quarter. However, non-interest income rose to $59.8 billion from $58.2 billion recorded in the prior-year quarter.
Total non-interest expenses for the institutions were $103.4 billion in the quarter, slightly down on a year-over-year basis. The decline was aided by lower premises and equipment expenses and reduced other non-interest expenses, though partly offset by higher salaries and employee benefits expenses.
Credit Quality
Overall, credit quality marked an improvement in the second quarter of 2012. Net charge-offs substantially plummeted to $20.5 billion from $28.9 million in the second-quarter of 2011.
Loss provisions for the institutions in the second quarter were recorded at $14.2 billion, down 26% from $19.2 billion kept for losses in the prior-year quarter.
For the ninth consecutive quarter, the level of non-current loans and leases (those 90 days or more past due or in non-accrual status) declined. Moreover, the percentage of non-current loans and leases also reached the lowest level in more than three years, since the first quarter of 2009.
Balance Sheet
Total loans and leases were $7.5 trillion, up 1.4% year over year. This marked the fourth quarterly increase of loans in the last five quarters. Total deposits also continued to rise and were recorded at $10.3 trillion, up 0.6% year over year.
As of June 30, 2012, the net worth of the Deposit Insurance Fund (DIF) increased to $22.7 billion, up from $15.3 billion as of March 31, 2012. The rise in fund included $4.0 billion kept for debt guarantees under the FDIC's Temporary Liquidity Guarantee Program.
Moreover, assessment revenue and lower expectation of bank failures also continued to impel growth in the fund balance. During the quarter, the contingent loss reserve, that covers the costs of expected failures, declined to $4.0 billion from $5.3 billion.
As of June 30, 2012, the number of "problem" institutions declined from 772 to 732, the lowest since year-end 2009. Total assets of "problem" institutions also fell to $282 billion from $292 billion.
Bank Failures
During the second quarter of 2012, 15 insured institutions failed, marking the smallest number of failures in a quarter since the fourth quarter of 2008, when it recorded 12 failures. Moreover, to date in the third quarter, nine banks have failed to sum the total for the year to 40. Last year the number stood at 68 failures in the comparable period.
Our Viewpoint
Besides the heartening decline in the list of problem institutions, the 12th straight quarter of consolidated profit from FDIC-insured banks is significantly impressive. While the financials of a few large banks continue to stabilize on the back of an economic recovery, the industry still remains on shaky ground.
The sector presents a similar picture to that of 2011, with nagging issues like depressed home prices along with still-high loan defaults and unemployment levels troubling such institutions.
The lingering economic uncertainty and its effects also weigh on many banks. The need to absorb bad loans offered during the credit explosion has made these banks susceptible to several problems.
Banks are actively responding to every legal and regulatory pressure. In fact, this promptness has positioned the banks well to encounter impending challenges.
As the sector is undergoing a radical structural change, it is expected to witness headwinds in the near to mid term. But entering the new capital regime will significantly improve the industry's long-term stability and security.
According to FDIC's acting chairman, Martin J. Gruenberg, the industry is now better positioned to support the economic stability. But we do not expect the potency of the sector to return to its pre-recession peak anytime soon. The economic intricacy may even result in further disappointments in the coming quarters.
However, it would be unfair to say that there has been no improvement. At least, the data from FDIC speaks otherwise. The industry is gradually moving towards regaining investor confidence.
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