Profits up, assets down at FDIC banks
Tuesday, 24 November 2009

By Matthew Quinn

Banks backed by the Federal Deposit Insurance Corp. as a group posted a $2.8 billion profit in the third quarter, following a $4.3 billion loss in the second quarter and up more than threefold from a year earlier.

However, the big story in the FDIC's latest quarter banking profile report was the continuing steep rise in loan-loss provisions and a sharp decline in loan balances at banks.

Total assets of insured banks fell for a third consecutive quarter. The $54.3 billion decline was led by falling loan balances, which dropped by $210.4 billion, or 2.8 percent, during the quarter. This is the largest percentage decline in loan balances in any quarter since insured institutions began reporting quarterly results in 1984.

The largest dollar drop occurred among commercial and industrial loans, which fell by $89.1 billion, or 6.5 percent. The decline reflects not only tighter credit standards at banks, but also less demand among worthy borrowers, analysts say.

Banks instead have been holding more of their funds at Federal Reserve banks and in U.S. Treasury securities, highlighting how risk averse they currently are.

The skittishness is understandable, as net charge-offs continued to rise, registering a year-over-year increase for an 11th consecutive quarter. Insured institutions charged off $50.8 billion in the quarter, an increase of 80.5 percent from a year earlier. The annualized net charge-off rate rose to 2.71 percent, from 1.43 percent a year earlier and 2.56 percent in the second quarter. This is the highest annualized net charge-off rate in any quarter since insured institutions began reporting quarterly income and expenses in 1984. The year-over-year increase in charge-offs was led by loans to commercial and industrial borrowers, but all major loan categories had sizable increases.

To compensate and help build reserves to protect against future losses, provisions for loan and lease losses totaled $62.5 billion among insured institutions, marking the fourth consecutive quarter that industry provisions exceeded $60 billion. On the bright side, it was the smallest year-over-year increase in quarterly loss provisions in the past eight quarters. Still, nearly two out of three institutions (62.6 percent) increased their loss provisions compared to a year earlier.

Overall, the industry set aside $11.7 billion more in loan-loss provisions than it charged off in the third quarter, contributing to a $9.2 billion (4.4 percent) increase in total reserves. This was the smallest quarterly increase in reserves in the past eight quarters, but it lifted the industry's ratio of reserves to total loans and leases from 2.77 percent to 2.97 percent.

However, growth in reserves continued to lag the rise in noncurrent loans, which increased by $34.7 billion in the third quarter, a 10.5 percent rise. That dropped the industry's ratio of reserves to noncurrent loans to 60.1 percent from 63.6 percent in the second quarter, marking the 14th consecutive quarter-over-quarter decline in the ratio.

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