Aided by lower tax rate, banks net $62 billion in 3rd Quarter (and biggest quarterly ROAA in 32 years)

Aggregate net income of $62 billion was recorded by federally insured banks and thrifts in the third quarter, with return on average assets of 1.41%, the highest quarterly level reported by the industry since quarterly reports were first issued in 1986, the Federal Deposit Insurance Corp. (FDIC) said Tuesday.

At a press briefing, FDIC Chairman Jelena McWilliams said net income growth was led by higher net operating revenue and a lower effective tax rate. “Loan balances grew, net interest margins improved, and the number of ‘problem banks’ continued to decline,” she said. The FDIC also reported that the percentage of unprofitable banks in the third quarter declined to 3.5% from 4% a year ago.

In the press briefing, FDIC Director of the Division of Insurance and Research Diane Ellis, said about half of the dollar increase in net income was attributable to tax reform. “Assuming the effective tax rate for the banking industry prior to the new tax law, we estimate that quarterly net income would have been $54.6 billion, or 13.9% higher than third quarter 2017,” she said.

But the growth posted by banks and thrifts is not without its caveats, McWilliams said. “While results this quarter were positive, the extended period of low interest rates and an increasingly competitive lending environment have led some institutions to ‘reach for yield,’” McWilliams warned. “Additionally, the competition to attract loan customers has been strong, and it will remain important for banks to maintain their underwriting discipline and credit standards. These factors have led to heightened exposure to interest-rate risk and credit risk.

“Attention to the prudent management of these risks will position banks to be resilient so that they can sustain lending through the economic cycle,” she said.

(In the 1-minute video: During the press briefing on the third quarter 2018 Quarterly Banking Profile, FDIC Chairman Jelena McWilliams responds to a reporter’s question about her request for consideration of revisions to the FDIC’s CAMELS evaluation system for banks.)

The FDIC also reported for the third quarter:

  • The third quarter net income of $62 billion was up $14 billion (29.3%) over the same period in 2017;
  • Net interest income was $137.1 billion, up $9.6 billion (7.5%) from a year ago, and 83% of banks reported an improvement from last year. The average net interest margin rose to 3.45 percent, up 15 basis points from a year ago, as average asset yields grew more rapidly than average funding costs.
  • Non-current loans continue to decline, but net charge-offs were about the same. Non-current loans (more than 90 days in past due or in nonaccrual status) were down $3.6 billion (3.4%) from the previous quarter (to $101.3 billion). The average net charge-off rate remained stable, FDIC said, from a year ago (at 0.45%). However, net charge-offs rose by $171.9 million (1.6%) from a year ago, led by an $837.8 million (12.3%) increase in net charge-offs for credit cards.
  • “Problem banks” are now at their lowest level since the third quarter of 2007, dropping to 71 institutions (from 82 at the end of the second quarter). Total assets of problem banks fell to $53.3 billion from $54.4 billion in the second quarter.

The agency report also noted that the number of FDIC-insured commercial banks and savings institutions fell to 5,477 (from 5,542) during the three months ended Sept. 30. One new charter was added during the third quarter, 60 institutions were absorbed by mergers, and there were no bank failures, the agency said.

FDIC-Insured Institutions Reported $62 Billion in Net Income in Third Quarter 2018