Bank net income up $56 billion in 1Q’18, FDIC reports; agency leader cites challenges ahead

FDIC’s chart shows net income history by quarter

Banks increased net income by more than 27% – $56 billion – in the first quarter of the year compared to the same period last year, the Federal Deposit Insurance Corp. (FDIC) reported Tuesday, but the outgoing leader of the agency also warned that an environment of rising interest rates, coupled with competitive lending conditions, poses challenges for many institutions.

“The industry must manage risks carefully to continue to grow on a long-run, sustainable path,” outgoing FDIC Chairman Martin Gruenberg said during a press conference. (Gruenberg is a holdover in the position; his term as chairman ended in November. The nominee to be his successor as chairman, Jelena McWilliams, awaits Senate confirmation, perhaps as early as this week.)

According to federally insured bank and savings institution financial results for the first quarter of 2018, FDIC said:

  • The net income increase of 27.5% was due to higher net operating revenue and a lower effective tax rate for insured banks;
  • Net interest income was up 8.5% from the same period a year ago;
  • Noninterest income increased 7.9% from a year earlier;
  • Loan balances rose 4.9% over the 12-month period ending March 31.

The FDIC said the aggregate net income of $56 billion in the first quarter of 2018 for banks and savings institutions was up $12.1 billion (27.5%) from a year ago. Of the 5,606 insured institutions reporting first quarter financial results, FDIC said, more than 70% reported year-over-year growth in quarterly earnings. The percent of unprofitable banks in the first quarter declined to 3.9% from 4.3% a year ago, the agency said.

Meanwhile, while the “problem bank list” is at its lowest number since first quarter 2008, the total assets held by banks on the list grew substantially. FDIC said the number of banks on the list declined from 95 to 92 during the quarter; however, total assets of problem banks increased from $13.9 billion in the fourth quarter to $56.4 billion at the end of first quarter 2018.

There were no bank failures during the first quarter, FDIC said; merger transactions absorbed 65 institutions. Three new charters were added.

The agency said the Deposit Insurance Fund’s (DIF) reserve ratio remains at 1.30% of reserves to deposits insured; the balance of the DIF rose by $2.3 billion during the first quarter to $95.1 billion on March 31, driven by assessment income, the agency said. The remained unchanged from the previous quarter. Estimated insured deposits increased by 2.6% from the previous quarter and 3.7% from a year ago, FDIC said.

Although he called the results “another positive quarter” for banks, FDIC’s Gruenberg also noted challenges ahead for the banking industry, saying those challenges will “remain a focus of supervisory attention.”

“While the performance of the banking industry has been positive, the current economic expansion is now the second longest on record,” Gruenberg said. “It is important to remain vigilant to underlying risks in the latter stage of this economic cycle.”

He said that in the current interest-rate environment, and with competitive lending conditions, challenges continue to be posed to many institutions. “Some banks have responded by ‘reaching for yield’ through investing in higher-risk and longer-term assets,” Gruenberg asserted.

“Going forward, the industry must manage interest-rate risk, liquidity risk, and credit risk carefully to continue to grow on a long-run, sustainable path,” he said.

He warned that the industry “also must be prepared” to manage the inevitable economic downturn smoothly and without undue disruption to the financial system. “The long-term objective for banks should be to position themselves during periods of good economic and banking conditions, as exist today, to be able to sustain lending through the economic cycle so that the industry can play a counter-cyclical role, and not a pro-cyclical role as occurred during the financial crisis,” he said.

FDIC-Insured Institutions Report $56 Billion in Net Income in First Quarter 2018

Chairman Martin J. Gruenberg’s Opening Statement First Quarter 2018 Quarterly Banking Profile