New tax law one-time charge cut into bank profitability for 4th quarter, full-year 2017

The new tax law cost banks profitability in the fourth quarter of 2017, as banks reported net income down nearly 41% from the same period a year earlier, the federal insurer of bank deposits said Tuesday.

The tax legislation also caused full-year profitability to be lower than the year before, the agency stated.

In releasing results from the fourth quarter of last year (and all of 2017), the Federal Deposit Insurance Corp. (FDIC) stated that the decrease in net income was from one-time charges banks posted as a result of the enactment of the Tax Cuts and Jobs Act of 2017. The FDIC said that reported aggregate net income was $25.5 billion for the fourth quarter, down $17.7 billion (40.9 percent) from the same period a year earlier.

“The decline in net income is primarily due to one-time income tax effects from the new tax law, including the revaluation of deferred tax assets and repatriation of income from foreign subsidiaries,” the FDIC said in a release.

The agency also noted that the one-time tax charge resulted in full-year net income for 2017 declining 3.5% (or $6 billion) from 2016. However, according to FDIC Board Chairman Martin Gruenberg, the decline in net income did not affect the overall health of the national banking system.

“Despite the decline in net income, the banking industry continued to show steady improvement. Loan balances grew, net interest margins increased, asset quality remained stable, and the number of ‘problem banks’ continued to fall,” he said during a press conference announcing the quarter- and year-end results.

However, the bank figures also show that, even without the tax charge, bank net income for the quarter would have been lower than the previous year. According to the FDIC, excluding the one-time income tax effects, estimated quarterly net income would have been $42.2 billion – down 2.3% from a year ago.

But had the one-time tax charges in the fourth quarter not taken effect, the FDIC said, for the full year net income would have been $183.1 billion, up 7.2% from the previous year.

In other results, the FDIC reported:

  • Net interest income was up 8.5% from fourth-quarter 2016: More than four out of five banks (86.4%) reported an improvement in net interest income from a year ago. The average net interest margin was 3.31% in the fourth quarter, up from 3.16% a year ago.
  • Number of banks on “problem list” lowest in 10 years: The number declined from 104 banks to 95 during the quarter, the lowest number of problem banks since first quarter 2008. Total assets of problem banks declined from $16 billion in the third quarter to $13.9 billion in the fourth. During the fourth quarter, merger transactions absorbed 64 institutions, two institutions failed, and one new charter was added.
  • Total loan and lease balances rose $164.1 billion during fourth quarter: Showing an increase of 1.7% from third-quarter 2017, all major loan categories increased, including credit card balances, up $69.6 billion (8.8%) from the previous quarter; commercial and industrial loans, up $24.5 billion (1.2%); and residential mortgage loans, up $21.7 billion (1.1%). Over the past year, loan and lease balances increased $416.1 billion (4.5%).
  • Noncurrent loan rate remains stable; net charge-off rate increases slightly: Loans 90 days or more past due or in nonaccrual status increased $1.5 billion (1.3%) during the fourth quarter. The FDIC said noncurrent balances increased for residential mortgages (up 2.8 billion, or 5.2%) and credit cards (up $1.2 billion, or 11.5%) but declined for commercial and industrial loans (down $1.7 billion, or 8.5%). The average noncurrent loan rate remained unchanged at 1.20 percent from the previous quarter. Net charge-offs increased $1 billion (8.6%) from a year ago, as the average net charge-off rate rose from 0.52% to 0.55%.
  • Deposit Insurance Fund’s (DIF) reserve ratio rose to 1.30%, highest since 2004: FDIC said this is the highest reserve ratio since the fourth quarter of 2004. By law, the fund must achieve a minimum reserve ratio of 1.35% by Sept. 30, 2020. FDIC said it expects the reserve ratio to reach 1.35% this year, ahead of the statutory deadline. The fund balance increased $2.2 billion during the fourth quarter to $92.7 billion, driven by assessment income, including surcharges on large banks, FDIC said.

FDIC-Insured Institutions Report Net Income of $25.5 Billion in Fourth Quarter 2017

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