Banks became more profitable in 3rd quarter, but net interest margins hit historical low point

Banks reported improved profitability in the third quarter of the year compared with the first half of the year, but their combined net interest margin fell to a record low, the federal insurer of banks reported Tuesday.

In releasing third-quarter 2020 financial results for the banking industry, the Federal Deposit Insurance Corp. (FDIC) said banks reported aggregate net income of $51.2 billion in the third quarter. That’s down 10.7% from the same period last year (when they reported about $57 billion in net income), but better than their first and second quarters of this year. In both of those periods, net income was at or below $20 billion.

However, the third-quarter results showed that banks were struggling to post a robust net interest margin (which measures the difference between net interest income a bank receives and the outgoing interest it pays on savings, essentially measuring the longer-term profitability of the banks). According to the FDIC numbers, bank net interest margin fell to the “unprecedented level” to 2.68%, down 68 basis points (bp) from a year ago and the lowest level, the agency said, “in the history of the Quarterly Banking Profile.”

Net interest income, the FDIC said, declined for a fourth consecutive quarter, falling by $10 billion (7.2%) from third quarter 2019—the largest year-over-year decline on record. “The annual reduction in yields on earning assets (down 139 basis points) outpaced the decline in average funding costs (down 72 basis points),” the FDIC said. “Nearly half of all banks (49.9 percent) reported lower net interest income year-over-year.”

In other areas, the FDIC reported:

  • Loan and lease volume fell slightly, declining by 0.8% (by $84.5 billion) from the previous quarter, with a reduction in commercial and industrial (C&I) lending of $150.3 billion driving the decline.
  • Asset quality weakened marginally, with noncurrent loans (those that were 90 days or more past due or in nonaccrual status) increasing by $9.3 billion (7.9%) in the third quarter.
  • The FDIC Bank Insurance Fund’s (BIF) ratio of reserves to savings insured remained at 1.3%, unchanged from the previous quarter. “Deposit growth stabilized during the third quarter after record increases in the first (quarter) of 2020 and is now near the average rate of growth between year-end 2014 and year-end 2019,” the FDIC said.

FDIC-Insured Institutions Reported Improved Profitability in Third Quarter 2020