Banking industry posts best quarter of profits since early 2007

The banking industry posted its best quarter of profits since early 2007 in the first three months of this year, but the sector is still far from regaining its footing.

The earnings totaled $29 billion in the first quarter, up nearly 67 percent from a year earlier, mostly because the industry no longer needs to set aside as much cash to cover losses on loans, the Federal Deposit Insurance Corp. reported Tuesday. The increase marks the seventh straight quarter of improvement from the levels of a year earlier.

Meanwhile, the FDIC has made gains toward rebuilding its depleted cash reserves while the number of troubled banks added to its “problem list” has leveled off, all signs of improvement as the industry pulls out from the depths of the financial crisis.

But revenue fell by 3.2 percent to $5.5 billion in the quarter from a year ago, in part because banks are making fewer loans and they’re making less money on those loans. The drop is noteworthy because year-over-year revenues have declined only once before in the past 27 years, said Jaret Seiberg, an analyst at MF Global Inc.

“This shows the banks are out of the crisis but they haven’t yet recovered,” Seiberg said. “The inability to grow revenue or to grow loans indicates that the banks aren’t back to business as normal.”

Experts who track the industry say that banks are retrenching because they face an uncertain regulatory climate that’s discouraged them from aggressively extending credit.

For starters, regulators are rolling out rules that will determine how much capital banks need to hold and will limit their ability to make money outside the traditional banking business, industry analysts said. The banks have also come under enormous political pressure to make loans at a time when there’s a dearth of creditworthy consumers.

“There does not seem to me to be a great regulatory push for them to lend,” said Nancy Bush, contributing editor to S&L Financial. The regulators “are happy that banks are not lending into a shaky economy because that would tend to produce shaky loans somewhere down the line. . . . It’s sort of ‘Yeah, we want you to lend — wink, wink, nudge, nudge.’ ”

On the flip side, demand for loans from creditworthy borrowers remains “sluggish,” as FDIC Chairman Sheila Bair told reporters Tuesday. So while government programs have injected liquidity into the system, banks are using those funds to invest in assets such as mortgage-backed securities instead.

Lower demand and tighter lending standards led to lower loan balances and interest payments, reducing revenue. Loan balances have declined in 10 of the past 11 quarters. Recent limits on the fees banks can charge customers also hurt revenue. “At some point, if the banks are to continue to increase their profitability, they will have to grow their revenues,” Bair said.

But Bair, who will leave her post in July, also highlighted some encouraging trends.

While 368 banks insured by the FDIC have failed since mid-2006, the number of bank failures has fallen for three quarters in a row. About 26 of them failed in the first quarter, the smallest number in seven quarters. The FDIC insures 7,575 banks.

And while more than one in 10 banks are on the agency’s problem list, only four lenders have been added to that list since the end of 2010, the smallest increase in more than three years, Bair said.

The agency is also beefing up its bank-generated cash reserves. The balance in this rainy day fund rose from negative $7.4 billion to negative $1 billion in the quarter. Bair said she expects those reserves to turn positive in June after seven quarters in the red.

Another pot of cash that’s used to cover projected bank failures fell to $13.8 billion by the end of the quarter from $17.7 billion at the end of last year.

Dina ElBoghdady covers housing policy for The Washington Post.
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