FDIC: Bank deposits up $1 trillion+ in Q2, net income down 70% year-over-year; average ROA at 0.36%

Bank Insurance Fund ratio drops 9bp to 1.3%

Insured banks saw rapid deposit growth during the second quarter and a deep decline in net income, year over year, amid ongoing economic strains related to the coronavirus (COVID-19), the Federal Deposit Insurance Corp. (FDIC) reported Tuesday in its latest Quarterly Banking Performance (QBP) report.

The average return on assets ratio for insured institutions fell from 1.38% in second quarter 2019 to 0.36 percent, the agency said.

According to second-quarter data, aggregate deposits in the 5,066 commercial banks and savings institutions insured by the FDIC grew by more than $1 trillion. Aggregate net income totaled $18.8 billion, down $43.7 billion, or 70%, from a year ago. The FDIC Deposit Insurance Fund grew $1.4 billion during the quarter, with that growth led by assessment income, to a record $114.7 billion, but its reserve ratio dropped 9 basis points, from 1.39% to 1.3%, due to deposit growth. FDIC Chairman Jelena McWilliams, during a press conference, said the fund ratio is expected to rebound and rise above its statutory minimum of 1.35% in the coming quarters.

“I want to emphasize that the fund has more money than at any time in the FDIC’s history, and the reduction in the reserve ratio was solely a result of the unprecedented increase in bank deposits,” McWilliams said in her published remarks. “We believe deposit growth is likely to normalize in the upcoming quarters and for the reserve ratio to rise above 1.35% without any need to modify assessment rates in the near term. As required by statute, the FDIC will publish additional analysis in the coming weeks.”

McWilliams said the unprecedented growth in new deposits “demonstrate public confidence in the banking system, as well as the system’s ability to accommodate unprecedented customer demand.”

According to highlights from the QBP:

  • The decline in net income is primarily a result of an increase in provision expenses of $49.1 billion to $61.9 billion. Slightly less than half (47.5%) of all institutions reported annual declines in net income. The share of unprofitable institutions increased from a year ago to 5.4%. Again, the average return on assets ratio fell from 1.38% in second quarter 2019 to 0.36%.
  • The net interest margin compressed at a record rate, falling 58 bp from a year ago to 2.81%, the lowest level ever reported in the QBP. Net interest income fell by $7.6 billion (5.4%) from second quarter 2019, marking a third consecutive quarterly decline. The decline in yields on earning assets (down 119 bp) contributed to the decline in net interest income. Less than half (42.2%) of all banks reported annual declines in net interest income.
  • Community banks grew net income 3.2%, year over year. Reports from 4,624 FDIC-insured community banks reflect annual net income growth of $202.5 million. Despite a 273% increase in provision expenses to $2.4 billion and continued net interest margin compression, more than half of all community banks reported higher net income. This increase was primarily attributable to higher revenue from gains on the sale of loans (up $1.4 billion, or 142.2%) and gains on the sale of securities (up $299.8 million, or 130.7%).
  • Lending activity related to the Paycheck Protection Program (PPP) drove community banks’ 13.5% growth in loans, year over year. The net interest margin for community banks compressed 17 bp, year over year, to 3.51% as the decline in  average earning asset yields outpaced the decline in funding costs.
  • Loan and lease balances grew during the quarter and year over year. Total loan and lease balances rose by $33.9 billion (0.3%) from the previous quarter. The commercial and industrial loan portfolio reported the largest quarterly dollar increase, up $146.5 billion (5.8%), driven largely by the implementation of the PPP, as $482.2 billion in credit was extended by the banking industry to businesses. Consumer loans declined $67.1 billion due to reductions in credit card balances. Over the past 12 months, total loan and lease balances grew 6.7%, slightly below the 8% annual growth rate reported last quarter.
  • Asset quality registered slight declines. The total noncurrent loan rate (i.e., 90 days or more past due or in nonaccrual status) rose by 15 bp from the previous quarter to 1.08%, and total noncurrent loans increased by $15.9 billion (15.5%) from the previous quarter. The total net charge-off rate rose by 7 bp to 0.57% from a year ago, and net charge-offs increased by $2.8 billion (22.2%) from a year ago. Overall, noncurrent loan and net charge-off volumes remained relatively low.

During the second quarter, one new bank opened, 47 institutions were absorbed through mergers, and one bank failed. The number of “problem” institutions was 52, down two from the first quarter; the problem institutions held an aggregate $48.1 billion in assets.

FDIC-Insured Institutions Reported Lower Profitability but Strong Liquidity and Higher Capital Levels in Second Quarter 2020